Markets need more clarity, and progress, on US trade and foreign policy issues

  • The European Union and China are fighting to keep their huge trade surpluses while accusing the U.S. of protectionism and destruction of multilateral economic and political systems.
  • Washington is ceding ground despite facts in its favor.
  • It's time to show progress on America's trade, and to re-state the foreign policy agenda.
President Donald Trump
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President Donald Trump

The G-7 summit meeting next month is an opportunity for President Donald Trump to clarify his views on trade and multilateral economic and political foundations of the world order.

It would be a great pity if the occasion were missed because — as some foreign leaders argue — Trump was too absorbed by watershed Congressional elections in early November.

There is no doubt that the president realizes how much the world affairs are inextricably part of key events that will determine the fate of his time in office next fall. Wall Street is reminding him of that every day with asset price changes in the wake of tax cuts, jobs and income gains and hopes of stopping America's decades-old losses of material wealth and cutting-edge intellectual property to unfair and predatory foreign trade practices.

It is urgent to begin showing some progress on those issues. Not by one-liner tweets, but with a clearly stated call for action on America's vitally important national interests.

That should be a comfortable exercise. America's trade case is solid. In the opposite corner are people posing as defenders of multilateralism and free trade who are, in fact, responsible for excessive trade surpluses at the expense of the U.S. and the rest of the world.

Here is a thought on how that could go.

The combined surplus of China and Germany on current transactions with the rest of the world came in last year at $463.4 billion. During the same period, the U.S. trade deficit on the equivalent external account was $466.2 billion.

If those three countries — representing nearly 40 percent of global demand and output — were taken as a proxy for the world economy, you would have a perfect textbook case to show that the balance of payments of the world is zero, exactly as it should be, with minor measurement errors.

What that also shows is that the Chinese and German trade surpluses would be enough to finance American deficits through purchases of U.S. government debt instruments. In other words, the Chinese and the Germans would be adding to their net foreign assets by recycling the dollars America paid them for their goods and services.

America, of course, is left holding the bag: It is accumulating net foreign debt. At the end of last year, that debt was recently estimated to have stood at $7.8 trillion.

Big deal? Of course it is, on several counts.

First, large and systematic trade deficits indicate an economic policy that excessively relies on external demand to generate income and employment. These are export-driven growth strategies also known under a less flattering name of "beggar-thy-neighbor" policies, because the countries pursuing such objectives live off their trade partners.

Second, those countries are in violation of the long-established rules of trade adjustment. They are also flouting constant G-20 recommendations to balance trade accounts for a stable world economy.

Third, these two major surplus countries are doing nothing in response to U.S. trade complaints over the last year-and-a-half. In the first quarter of this year, the combined trade surpluses of China and the Germany-led European Union accounted for 62.4 percent of America's total trade gap. That is almost identical to 65 percent for last year as a whole.

With all that, the trade miscreants, and their apologists, continue to vilify the U.S. as a protectionist destroying the rules-based multinational trading system — simply because Washington sought relief from soaring debts and deficits, with losses of jobs, incomes and intellectual property.

And that outrageous perversion continues. As recently as last Friday, the International Monetary Fund, the U.N.'s key economic and financial agency, warned at an international business meeting in Russia about "the darkest cloud" over the world economy caused by the "determination of some (read: the U.S.) to actually rock the system that has actually presided over the trade relationships that we have all undertaken and enjoyed to some extent over the last many decades."

Enjoyed, indeed — at America's expense.

That's what Trump is told by a U.N. agency whose original charter calls for a symmetrical obligation of deficit and surplus countries to balance their trade accounts in order to make possible a system of stable exchange rates in a steadily growing world economy. Essentially, that is still the IMF's mission.

Washington should take a note of that, and stop whining that balancing America's trade accounts will be very difficult. That defeatist stand sounds like the countries that, in Trump's vernacular, are "ripping us off" should be doing the country a favor by buying more American goods and services.

This is no time for a trade discourse via tweets and occasional off-the-cuff broadsides. The G-7 meeting next week is a stage to demand a rapid reduction of America's excessive trade deficits.

Trump should also know that his trade opponents are regrouping. German Chancellor Angela Merkel completed last week her 11th visit to Beijing, where, apparently, she secured substantial alternatives to German export sales on American markets. German media are reporting that she even explored a free-trade agreement with China — a total reversal of recent threats and accusations she leveled at Beijing's discriminatory trade and investment practices, and the Chinese meddling in Germany's Central and East European backyards.

That's called realpolitik, and it came with kudos from German media for showing Trump how things are done.

Investment thoughts

With the Federal Reserve poised for interest rate increases in response to rising inflation and a strengthening economy, markets are increasingly sensitive to trade frictions and military confrontations.

The U.S. should calm things down by making sure that China and the EU accept — without the usual equivocations — to fully cooperate in a rapid balancing out of trade accounts with America.

Overseas tensions with proxy wars and debilitating sanctions is another source of problems depressing U.S. asset prices — in spite of a favorable market environment created by supportive fiscal policies and the Fed's measured pace of liquidity withdrawals.

Unless Trump can reduce trade frictions and geopolitical confrontations in Eastern Europe, the Middle East and East Asia, he should not count on another tax cut to rev up financial markets in anticipation of next November's elections.

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.