East Asia is the chief banker to the world. Your move, America

A student runs past a man checking his phone in front of a display showing bank notes of different currencies in Hong Kong on November 9, 2016.
Anthony Wallace | AFP | Getty Images
A student runs past a man checking his phone in front of a display showing bank notes of different currencies in Hong Kong on November 9, 2016.

Excess savings of the eight major East Asian economies currently stand at $755 billion. That represents two-thirds of the world's total.

The savings aggregates in question come from East Asia's surpluses on goods and services trade with the rest of the world. And since money always flows from surplus to deficit units, these excess savings will go to deficit countries in exchange for financial and real assets.

The U.S. is by far the world's largest deficit country on its foreign trade accounts. Half-a-trillion dollars (about 3 percent of GDP) of foreign savings will be needed this year to help balance America's books – that's how big a deficit will be on our trade in goods and services with abroad.

The story, of course, does not end there. Trade surpluses – i.e., capital exports -- used to acquire foreign assets will be added to surplus countries' net (foreign) creditor positions, while debt instruments sold to foreigners will be added to debtor countries' net (foreign) liabilities.

For example, this year's trade surplus estimates of $300 billion, $200 billion and $105 billion for China, Japan and South Korea, respectively, will be added to their already large net foreign asset positions.

It will be exactly the opposite for the U.S. Those $500 billion of our IOUs sold to overseas creditors will continue to swell our net foreign liabilities. At the end of this year's second quarter (the latest data point available), these liabilities stood at $8 trillion, a $1.3 trillion increase in the year to last June.

Wake up, Uncle!

Those who think that this foreign debt does not matter because we pay our overseas creditors with greenbacks we print as we please should think again. And so should those who tell us that even if the foreigners dumped simultaneously the $6 trillion of Treasury debt they held at the end of last October would just be a small blip on trading screens.

America's large and systematic trade deficits, and the soaring net foreign debt, are very serious issues of public policy. At unchanged trading conditions, these problems will get much worse in the months and years ahead.

You can easily imagine that countries running large trade surpluses with the U.S. are very much looking forward to their rising exports as Washington initiates its widely expected fiscal stimulus and growth-enhancing structural policies.

If nothing is done to coordinate economic policies with our key trade partners, stronger demand in the U.S. would promptly leak out to the rest of the world (via increasing imports) and would put downward pressures on jobs and incomes in American import-competing industries. Rising imports and shrinking market shares of our industries would offset a good part of the stimulus and would take percentage points from the growth of our domestic demand.

It is, therefore, reassuring that the President-elect Donald Trump sees the gravity of our foreign trade problems and of our soaring domestic and foreign public debt.

The wealthy European free-riders were indignant when Mr. Trump told them that he would ask "have you paid your way" whenever they dialled America's "911 military service." But their patronizing talk has changed since. Now they know that they can't bull their way by dispensing irrelevant "lessons about Europe;" they are getting ready to pony up.

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.

Sixth, China is making steady progress in changing its growth composition toward household consumption, residential and infrastructure investments and business capital spending. Put the exchange rate issue to the side. The alleged exchange rate manipulation is a technically tenuous argument (in fact, theoretically and practically indemonstrable). As was the case with some pre-euro EU countries, China's exchange rate problem is part of its difficulties with capital account transactions.

But do insist on fair access of U.S. companies to Chinese markets.

Seventh, remember that the U.S. helped to build China as an economic powerhouse by direct investments, technology transfers, opening up of American markets and offering the dollar as an anchor to Beijing's economic and industrial policies. All that, plus a very, very hard work of the Chinese people brought the economy the size of The Netherlands' in late 1970s to the second slot in world rankings.

Use that formidable guanxi to create a strong and balanced Sino-American economic relationship.

Investment thoughts

Before setting in train fiscal and structural stimuli to rev up the economy, the new administration would do well to (a) work closely with the Fed and (b) address foreign trade issues.

A carefully crafted monetary-fiscal policy mix is essential to stabilize the bond market and avoid a crippling effect of rising costs of consumer credit and housing finance.

Problems of large trade deficits with East Asia will take time to solve. But, for a start, Japan and South Korea could generate more growth from domestic demand. That would expand U.S. export markets. Some of our trade deficit with China could also be cut by bringing back parts of American manufacturing in China producing exports for the U.S.

In addition to bilateral consultations, G20 and IMF forums can be used to ensure correct trade adjustments, and a better economic policy coordination to reduce unsustainably large global trade imbalances.

The contours of most of these policy changes should be emerging soon. Mr. Trump knows that the U.S. cannot keep piling up trillions of dollars in foreign debt by being the world's buyer of last resort.

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