USA needs to fix its massive global trade gaps if 'America First' is going to work

  • A sense of urgency is needed to fix a weak and unbalanced U.S. economy
  • Global commitments should be examined for excessive claims on domestic resources
  • Trade numbers show that the U.S. remains a widely open economy

Amid seemingly unstoppable urges to use enormous means to confront America's strategic adversaries everywhere around the globe, the U.S. monetary authorities worry about a deflationary economy, crashing bond yields, ominous economic growth signals from a flattening yield curve and fiscal policy's inability to control soaring public debt and intractable budget deficits.

Vice President Mike Pence laughs as President Donald Trump holds a baseball bat. Trump promised he would take more legal and regulatory steps during the next six months to protect American manufacturers, lashing out against trade deals and trade practices he said have hurt U.S. companies.
Carlos Barria | Reuters
Vice President Mike Pence laughs as President Donald Trump holds a baseball bat. Trump promised he would take more legal and regulatory steps during the next six months to protect American manufacturers, lashing out against trade deals and trade practices he said have hurt U.S. companies.

The implied dissonance between ends and means gets even more puzzling as countries that Washington wants to go to bat for, with nukes if necessary, are seen schmoozing with America's arch rivals.

South Korean and Japanese leaders, for example, came to Russia's Eastern Economic Forum in Vladivostok last week (September 6-7, 2017) to discuss megadeals in Moscow's high-priority Far East development programs.

Among the projects were Russian railways and gas pipelines connecting North Korea and South Korea on the table as the South Korean President Moon Jae-In was promising to build "nine bridges" with Russia (gas, railways, northern maritime routes, common shipbuilding, agricultural production, etc.).

He expected that Seoul, Pyongyang and Moscow would closely cooperate to make that happen. That, reportedly, elicited an echo from the North: "Yes … but not right now."

Bridges protected by US nukes

The Japanese Prime Minister Shinzo Abe — basking in a first-name bonhomie with the Russian President Vladimir Putin at a time when more than 50 Russian-Japanese agreements and memoranda were signed on existing and prospective business ventures — sounded like he had no doubt that he would get back some of the four islands the Red Army took from Japan in the closing days of WWII.

Tokyo, he said, wants to build "eight bridges" with Moscow (energy, manufacturing, hi-tech, agriculture, healthcare, urban planning, etc.) and to sign a long-delayed Russian-Japanese peace treaty.

Japan is also actively considering (whatever that means) a 26-mile bridge between Hokkaido and Sakhalin (Russia). That's where, according to Abe, Japan's sophisticated railway technology could make the Rising Sun Archipelago an Asian continental entity.

Washington considers South Korea and Japan among its closest Asian friends and allies. Both countries are totally relying on America's commitments to defend them should violence break out on the Korean Peninsula or elsewhere in East Asia.

China, for its part, remains a darling of our European friends for dangling tantalizing business deals and taking a firm stand in favor of unrestricted globalization and free trade.

That's music to the German-led Europe, mainly because Beijing is seen taking a swipe at Washington's attempts to review trade policies that are highly damaging to the American economy.

And here is a crucially important point: America's announcement of these new trade policies is what infuriated the Germans to the point of espousing a strong advocacy of an economic and political rapprochement with China, and calling on the EU countries to rally around Berlin to "take European destiny in our own hands."

Sounds familiar, doesn't it? Remember the old slogan "It's the economy …?"

President Donald Trump's threats to German car manufacturers, vaguely stated intentions against Germany's excessive and systematic trade surpluses with the U.S., and Washington's totally justified criticism of Berlin's reliance on exports instead of domestic demand are at the core of a strong anti-American bent in German politics.

Trump's hostility to climate change agreements, and his call for Europe to honor financial obligations to the NATO military alliance are entirely peripheral to cooler trans-Atlantic relations.

That now leaves us with some former Soviet bloc countries as our best European allies because they want American political and military protection against the perceived threats from Russia.

Kissinger: This is all economics

And here is a question: When will Washington find a more suitable alternative to the law of entropy (hey, we have to be everywhere to prevent chaos and our enemies from taking over) and realize that America cannot sustain that sort of growing stress on its resources when the limits of labor and physical capital are setting the noninflationary economic growth at a pathetic 1.5 percent?

Peter Altmaier, the chief of staff at the German Chancellery (often dubbed as the most powerful man in Germany), complained, tongue-in-cheek, a few weeks ago, during a highly learned seminar, that he was just "a simple lawyer," but that "all politicians should have some basic education (Grundbildung) in economics."

Altmaier's intellectual discovery reminds one of Henry Kissinger's dismissive remark that the balance-of-power problems he was looking at all boiled down to economics, a field of study where, to put it mildly, he claimed no particular expertise.

So, a good place to start that German-style Grundbildung in Economics 101 for those lambasting the White House for alleged "trade protectionism" and "withdrawal from the world stage" would be a quick look at the foreign trade numbers for July published last week.

Here is what they would see: The U.S. foreign trade deficit in the first seven months of this year came in at $456 billion, a 7.5 percent increase from the year earlier. Not bad, one might say, for a country accused of trade protectionism and disengaging from the rest of the world.

Now, seriously, is that deficit a big deal?

Yes it is, because that would be added to America's net foreign liabilities — which amounted to $8.1 trillion at the end of the first quarter of this year — while the money the U.S. pays to settle these trade deficits with Europe and Asia (mainly China) will be added to their net foreign assets.

Some wise guys will tell you that the U.S. should not care about that because it pays these debts in its own currency.

In other words, the U.S. is enjoying a proverbial "free lunch" — or what Europeans call "deficits without tears" — meaning that Washington can be adding forever to its huge pile of foreign debt.

That is precisely what the U.S. has been doing for the last 42 years, accumulating $20 trillion of public sector liabilities, nearly half of which are owed to non-residents.

The "free lunch" of course is a myth for two other important reasons.

First, a trade deficit is a subtraction from the U.S. GDP — and that is a drag on already weak economic growth.

Second, imported foreign goods and services are depressing jobs and incomes in American import-competing industries.

That often happens in violation of international trade rules, or by taking advantage of "loopholes" in American free-trade agreements. And here is how big a pressure on domestic industries that is: America's imports in the first seven months of this year stood at $1.3 trillion, an increase of 7 percent from the same period of 2016.

Investment thoughts

I continue to believe that "America First" is a fine piece of statecraft with analogues in successful nation-states all over the world.

The pejorative sobriquets of "protectionism" and "isolationism" linked to America First are utter nonsense. How can you call "protectionist" and "isolationist" a country contributing to the rest of the world nearly $1 trillion net every year?

Would countries like China and Germany, which are living off the rest of the world with their trade surpluses of $450 billion and $270 billion respectively, be more open and more actively present in global economic and political exchanges?

Please forgive my broken record, but let me repeat once again my long-standing appeal: American legislative and executive authorities may wish to step up their efforts to invigorate and balance out the economy with an appropriate combination of monetary, fiscal, trade and structural policies.

Washington's paralyzing partisan infighting is now the stuff of jokes, invective and rejoicing by its friends and foes around the world.

The world misses the U.S. whose economic policies used to show and lead the way.

Commentary by Michael Ivanovitch, an independent analyst focusing on world economy, geopolitics and investment strategy. He served as a senior economist at the OECD in Paris, international economist at the Federal Reserve Bank of New York, and taught economics at Columbia Business School.

For more insight from CNBC contributors, follow @CNBCopinion on Twitter.