Mr. Trump has also sent message to rich Gulf monarchies, sitting on 40 percent of world oil reserves and clamoring for "safe zones" in Syria. Yes, he told them, he could try to do that -- but they would have to pay for it.
Enforce the trade rules
The core of the problem, however, is an unsustainable progression of America's external deficits, (domestic and foreign) public debt and the economy's dismal (1.6 percent) noninflationary growth potential. In that context, issues raised by our largest trade deficits in East Asia need urgent and careful attention. [And while Mr. Trump is at it, he might also like to take a look at our large trade deficits with Germany and Mexico.]
Here are a number of things the new administration might wish to consider.
First, linking trade with broader political and security issues is not necessary. That's a club in the closet, but it need not be the first line of attack. There are plenty of legitimate instruments (not trade-war bazookas) and agreed international trade rules to prevent beggar-thy-neighbor policies, unfair practices and to enhance the competitive standing of U.S. businesses.
Second, based on numbers for the first ten months of this year, the U.S. trade deficits with China ($289 billion), Japan ($56.5 billion) and South Korea ($24 billion) are by far the largest in East Asia and account for nearly two-thirds of America's total trade gap over that period.
Third, these deficits are not of the same nature. Our Japanese and Korean deficits have considerable cyclical features, because American companies don't have large manufacturing operations in these countries that are geared toward exports to the U.S. In view of that, it could be possible to make quick progress with Japan and South Korea toward some narrowing of existing trade gaps.
Fourth, Japan and South Korea are perfect candidates to stimulate domestic demand that would expand markets for U.S. exports. With a trade surplus going toward 4 percent of GDP, Japan got nearly half of its growth from the rest of the world – i.e., from its trade surpluses -- in the first nine months of this year. Similarly, South Korea's net exports amount to 7.5 percent of GDP; they are expected to contribute up to half a percentage point of economic growth in 2016.
With large trade surpluses and a continuing deflationary bias, Japan and South Korea should be generating more growth from their private (and public) sector consumption, housing and business investments. That conclusion follows from the international rules of trade adjustment.
Fifth, China is a much more complicated case. Exports to the U.S. of our companies operating in China – and exports of Chinese companies to the U.S. enabled by years of our technology transfers to China – have built a large structural component in the Sino-American trade. The solution here is to leave alone the U.S. companies' manufacturing serving the Chinese market, but to create conditions to repatriate the segment of manufacturing operations producing exports to the U.S.