Based on gross domestic product numbers for the first quarter of this year, 27.1% of the U.S. economy was directly affected by international trade in goods and services, and the deficit on those transactions — $606.7 billion — accounted for 3% of America's demand and output during that period.
But the story does not end there.
Income and price effects from America's external sector are feeding to the rest of the economy. Rising imports, for example, are depressing incomes and employment in American import-competing industries. Conversely, rising exports are supporting American jobs and incomes.
That means that international trade in goods and services affects most of the U.S. economy. The only segments — the sheltered sectors — of the economy escaping the impact of foreign competition are those protected by regulatory provisions in particular service and manufacturing industries.
To the delight of American trade partners, that also means that Washington is running a widely open economic system.
The U.S. is poorly defending that simple fact against preposterous claims that it is out to destroy the multilateral trading system and free trade. With its systematic half-a-trillion dollar annual trade deficits, the U.S. is by far the largest net contributor to the growth of the world economy.
By contrast, it is so simple to show the world that Europe, China and Japan are killing other countries' jobs and incomes with their massive trade surpluses, while living off the U.S. and the rest of the global community.
Sadly, America's current trade policies won't change that. They won't even reduce trade deficits with Europe and Japan — close friends and allies and long-standing G-7 partners.
In spite of threats and hostile tweets, U.S. trade deficits with Europe and Japan rose at an annual rate of 11.5% and 4.1%, respectively, during the first five months of this year.
The reason is simple: The U.S. economy accelerated from an annual rate of 2.8% in the first half of last year to 3.2% in the first quarter of this year. Over the same period, the European economy slowed down from an annual rate of 2.2% to 1.5%. In Japan, domestic demand in the first quarter of this year virtually collapsed to an annual rate of 0.6%, while the trade surplus accounted for 73% of the country's 2.2% economic growth.
Those are the income effects. America's strengthening aggregate demand pulled in $284.3 billion worth of European imports during the January-May interval, a whopping 22.5% increase from the same period of 2018, as European companies looked for salvation in growing and open American markets. Japan's exports also increased by 4%, breaking a moderating trend of Japanese sales to the U.S.
No amount of threats and hostile tweets will change those trade developments. So, what's the solution?
The solution is called economic policy coordination — a concept established at Bretton Woods in July 1944 to provide economic stability to an emerging international monetary system.
What is that policy coordination? Put simply, it is a symmetric obligation of surplus and deficit countries to correct excessive trade imbalances. Surplus countries have to stimulate their internal demand to expand markets where deficit countries can sell to improve their trade accounts while restraining inflation and domestic demand.
The failure of the U.S. and (western) Europe to respect those rules of economic policy coordination led to the breakdown of the Bretton Woods system of fixed but adjustable exchange rates in August 1971. Four years later, France and West Germany sought to establish a forum for such policy coordination at the level of heads of state and government in a first G-6 meeting in November 1975. In addition to those two countries, the meeting was also attended by leaders of the United States, the United Kingdom, Japan and Italy.
Ever since, the issue of member states' economic policy has been at the core of G-7 (the original G-6 plus Canada) deliberations. To provide a wider forum, including the developing nations, a G-20 group was established in September 1999 as the main global platform for economics and finance.
Neither the G-7 nor the G-20 have helped the U.S. address the issue of economic policy coordination to reduce its systematic and excessive trade deficits.
Instead of using the G-20 meeting in Osaka, Japan last month to force trade surplus countries to stimulate their economies, and to stop living off the rest of the world, Washington acquiesced in European and Chinese lectures about the virtues of a multilateral trading system and free trade.
That failure could still be corrected during the G-7 summit in France next month. In the run-up to that meeting, Washington should work with Europe and Japan to get them to promptly and strongly stimulate their economies and begin to radically reduce their excessive surpluses on U.S. trades.
The U.S. should insist on economic policy coordination with Europe and Japan to reduce its unsustainably large trade imbalances. Reciprocal trade measures could also be used to correct discriminatory treatments of American goods and services.
China is a different story because trade problems have become part of broader geostrategic disagreements with the United States.
Beijing, however, seems to be working around the trade dispute by following a smart example set by South Korea. Seoul has nearly cut in half its trade surplus with the U.S. from a record-high $28.3 billion in 2015 to an almost negligible $17.9 billion in 2018.
China is a relatively late starter, but it did manage to cut its trade surplus with the U.S. by 10% in the first five months of this year. That, of course, is too slow to make a meaningful difference.
If China accelerated that trend, the trade dispute would calm down, leaving political and technological issues that financial markets won't fret about.
But, again, the U.S. must make a G-7 deal with Europe and Japan to cut its trade deficits through economic policy coordination and reciprocal measures to address market access issues.
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.