The US Can Solve Its Trade Problems While Relaunching The World Economy

Pursuing one of American core national interests, the U.S. administration lost a multilateral dimension of its forceful quest to balance trade accounts.

Washington's unassailable trade case against China, the European Union, its North American neighbors and Japan is fundamentally an issue of world economy. Reducing that case to bilateral quarrels robs America of a powerful negotiating advantage, and of the high moral ground of a world leader.

Buying more than half-a-trillion dollars worth of goods and services more than it sells to the rest of the world, America is making a large net contribution to the rest of the world, and remains an indisputable locomotive of the global economy. Washington, therefore, has a very different role on the world stage than major trade surplus countries taking nearly a trillion dollars of purchasing power from their trading partners.

As a result, America is squarely at the helm of the crucial issues of international economic policy coordination — the key mission of G-20 summits, which serve as the world's principal economic forum.

The G-20 meeting, scheduled for late June in Japan, could be an opportunity for the U.S. to begin reducing its trade deficits — large subtractions from its aggregate demand — by leading the way to an appropriate economic policy coordination on a global scale.

The time for such an initiative could not be better: The world economy is expected to slow down considerably, mainly as a result of the weakening aggregate demand in Europe and China, which represent nearly 40 percent of global demand and output.

Those two large trade surplus areas have been for years a drag on global growth. Their slowdown will now aggravate the downward pressure on the rest of the world because their businesses will be stepping up exports to escape the shrinking markets at home.

Perversely, in spite of that, those trade surplus areas are getting a free pass. By contrast, the U.S. is branded a culprit because it is trying to fight such beggar-thy-neighbor policies in a — so far — unsuccessful attempt to reduce its large trade deficits and put an end to its soaring net foreign debt.

Here are a few ideas on how the U.S. can rebalance its trade accounts by relaunching the global economic activity.

First, Washington should weave its strategy around the established principles of international trade adjustment that have guided efforts of global policy coordination ever since the first G-6 summit at Rambouillet, France, in November 1975.

Second, those principles are used to determine which countries should be expanding or contracting their aggregate demand as a result of their trade positions, fiscal stance, inflation and employment.

Usually, the trade surplus countries — which are producing more than they are consuming and exporting their excess production — are prime candidates for expansionary demand management policies. They also tend to run relatively sound budget accounts and low inflation. Conversely, trade deficit countries are forced to restrict their domestic demand for reasons of rising inflation and budget deficits.

For a balanced world economy, trade adjustments symmetrically apply to surplus and deficit countries. In practice, however, surplus countries have ignored those rules because they are under no market pressure to adjust their external accounts. The burden of adjustment is, therefore, entirely borne by deficit countries because they have to attract, if they can, foreign savings to fund their deficits. In most cases, they have to submit to stringent adjustment policies as part of conditional lending by the International Monetary Fund.

Third, on the basis of trade adjustment rules one can show, as an example, that the euro area, whose trade interests are represented by the European Union, is a prime candidate for expansionary demand management policies. The monetary union is currently running a trade surplus of more than $600 billion, it has nearly balanced public sector accounts and shows a headline inflation of 1.4 percent in January. At the same time, the euro area is struggling with a 7.9 percent jobless rate, 16.6 percent of its youth is unemployed, and a total of 12.9 million of its people are out of work.

A similar analysis for major Asian trade surplus economies like China, Japan and South Korea — accounting for one-fourth of the world output — would also show that their stronger domestic demand and greater openness to international flows of trade and finance could make a substantial contribution to a faster growing global economy.

Fourth, Washington should be aware that the European and Asian trade surplus countries are expecting to continue dumping their excess output on U.S. markets. Those are decade-old habits deeply ingrained into their economic policies. The White House has to clearly signal that those times are over. America's trade accounts have to be balanced, the growth of its debts and deficits must be stopped and reversed — and the U.S. now expects that its main trade partners will do their share of supporting global economic growth.