German Chancellor Angela Merkel deliberates with U.S. President Donald Trump during the G-7 summit in Canada on June 9, 2018.
At the risk of belaboring the obvious, it might be useful to revisit the problem of U.S. foreign trade policies for one simple reason: Countries running large and systematic trade surpluses with the United States seem emboldened by divisive domestic controversies about attempts to stop decades-old trillion dollar transfers to the rest of the world.
How else to explain the shocking refusal, and a defiant foot-dragging, of major trade surplus nations to heed America's legitimate complaints with readiness to promptly correct their excessive, growing and unsustainable trade advantage?
I believe those countries are making a big mistake by reading too much into American policy disputes. They fail to see that Washington can no longer tolerate blatantly unfair trading practices, rising foreign debt and the drag on economic growth from its sharply declining net exports.
Since the early 1980s — when the U.S. began running increasingly large deficits on its trade of goods and services with the rest of the world — to the end of last year, America's net external trade losses came in at more than $11 trillion. In the process, the U.S. kept piling on foreign debt that reached an astounding $7.9 trillion at the end of the first quarter of this year.
Stop the bleeding
That's what America has to show for its role as a benevolent banker to the world, hell-bent on a dogmatic pursuit of unfettered free trade in a world where the German-led European Union, Japan and lately China based their economic policies on mercantilist export-driven growth.
The U.S. is now stuck on a trade treadmill: This year and next, the Treasury is expected to sell to foreign creditors $1.2 trillion worth of debt instruments to finance America's sharply widening trade gap.
Those numbers will hit U.S. public finances at a time when the budget deficit by the end of next year could be approaching 7 percent of GDP — with the public debt, currently at $21.5 trillion, rising to 110 percent of GDP.
If those numbers are not enough to convince people that foreign trade problems are inseparable from national security considerations, maybe some events from recent economic history could help to provide more food for thought.
The U.S. decided in August 1971 to cease dollar redemptions for gold by countries running dollar-denominated trade surpluses. The European allies — whose security was underwritten, and still is, by Washington's military protection — were the ringleaders of a relentless onslaught on the U.S. gold window. France started the process in February 1965 by asking that its dollar reserves be exchanged for the yellow metal at the official price of $35.5 per ounce of fine gold.
Four years later, in November 1975, the French and German leaders organized the first G-6 meeting in France, because the weakening dollar was pushing up their currencies and threatening their external trade accounts. They wanted the U.S. to drastically reduce its money supply, raise interest rates and drive up the relative price of the dollar. That was a recipe for a deep and intractable U.S. recession — or something much worse.
Fortunately, then-President Gerald Ford refused to oblige.
Those seminal events underscored the importance of continuing to search for international economic policy coordination. Such efforts aimed at enforcing an elusive process of trade adjustment, where systematic surplus countries were expected to stimulate their domestic spending and open up their markets so that deficit countries could correct their external accounts without going through periods of severe recessions and rising unemployment.
America's free lunch that never was
Sadly, that symmetric trade adjustment process, meant to apply equally to surplus and deficit countries, has always been a non-starter — and it still is.
The U.S. acquiesced in such an unhinged multilateral system of trade and finance, apparently thinking that getting real resources from abroad in exchange of its own IOUs was a wonderful deal.
And then, suddenly, Washington began to realize that the proverbial free lunch was bad business.
A debt-ridden Washington found itself with a huge bill of providing security for a rich European Union with overflowing state coffers. At the moment, the EU is running a surplus on its U.S. trades at an estimated annual rate of $163 billion — 8 percent more than it pocketed in 2017.
Most of that goes to Germany. In the first seven months of this year, Berlin's trade surplus with the U.S. was 11.2 percent above the same period in 2017, reflecting the idea that Germans are not even thinking about balancing their books with Washington.
Japan reportedly wants to talk about its $70 billion surplus on U.S. trades. Nobody seems to know what that really means. Tokyo, however, should be in no doubt that it is expected to quickly and substantially reduce its large trade imbalance with the U.S.
But what is one to think about a trade deficit with China, currently on course to hit $400 billion by the end of this year? We have there a country officially branded by Washington as a "strategic competitor" and a "revisionist power" challenging the American world order.
And then, think of this: The U.S. is now running huge trade deficits with countries refusing to finance the American trade gap by recycling their dollar income in purchases of Treasury's securities. In the first half of this year, China, Japan and Germany had a cumulative trade surplus with the U.S. of $253.2 billion — nearly two-thirds of the total — but, over that period, their holdings of American government debt declined by $38.8 billion.
Investment thoughts
America's unsustainably large trade imbalances and soaring public debt are compelling issues of national security.
Preferably, solutions should be sought through negotiations, on the view that the U.S. has an unassailable case for a prompt and substantial reduction of its excessive trade deficits with the EU, Japan and China.
It should be possible that such a policy could work with the EU and Japan. After all, they are considered to be American friends and allies. Unfortunately, the trade numbers over the last year and a half are not encouraging at all. Nothing has been conceded to Washington, their surpluses continue to grow, and there is no telling when all that will stop.
In the case of China, the bilateral trade is directly and inextricably linked with issues of American national security. As the situation now stands, the unfolding political confrontation between Washington and Beijing is likely to worsen considerably. If that unfortunate trend were to continue, an indefinite shrinking of U.S.-China economic relations seems inevitable.
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.
