COLUMN-Trump must choose between economy and trade war: Kemp
(Repeats item that first ran on Friday)
* Chartbook: https://tmsnrt.rs/2Zc2SRJ
By John Kemp
LONDON, Aug 23 (Reuters) - The White House is becoming
increasingly volatile and erratic in its pronouncements about
the economy and trade as the internal contradictions between its
policies become obvious.
President Donald Trump and his advisers have blamed the
Federal Reserve and a range of foreign governments including
China and Germany for the evident slowdown in the economy,
especially manufacturing, saying that:
U.S. interest rates are too high.
The U.S. dollar is too strong.
Foreign governments are manipulating their currencies to
obtain an unfair competitive advantage.
Past trade deals were one-sided.
In all, China, Germany, Japan, South Korea and a host of
other countries have been blamed for trade and financial
policies that harm the United States, according to the
But more than two years into a bold effort to remake U.S.
international policy by using tariffs to increase leverage in
trade negotiations, the trade deficit is still growing at an
annual rate of 15%.
There is no evidence the U.S. currency is significantly
overvalued or that currency misalignment is contributing to the
The U.S. dollar exchange rate against a trade-weighted
basket of other currencies is close to its long-run average,
once adjusted for differential inflation rates.
Instead, the deficit stems from the fact that the United
States spends more on investment in new buildings, equipment and
software than it saves out of national income, borrowing the
difference from foreigners.
The deficit is increasing rapidly because the U.S. economy
is growing faster than the economies of its major trading
As a result of differential growth rates, domestic demand
for imports is growing more quickly than demand for U.S. exports
in overseas markets.
The administration’s tariff and sanctions policies have made
the deficit worse by contributing to a sharp slowdown in growth
in China and the rest of Asia and Europe, which is slowing
demand for U.S. exports.
U.S. exports of goods and services fell 1.5% in the three
months between April and June compared with the same period a
year earlier, the fastest decline for almost three years.
The last time U.S. exports declined was during the mid-cycle
slowdown of 2015/16 and before that the recession of 2008/09.
TRADE WAR OF ATTRITION
The export slowdown is rebounding on the United States,
contributing to a slowdown in the domestic economy, especially
the more trade-exposed manufacturing sector, and in turn curbing
The continent-sized U.S. economy is much less open to
international trade than most other major economies in terms of
the share of imports and exports in gross domestic product.
But the influence of trade on domestic growth is evident in
the nearly synchronised acceleration and deceleration of exports
and imports in the past 25 years.
The Trump administration is waging a war of attrition
against China and other trading partners, and one of the
consequences has been to hit domestic growth.
By turning the entire U.S. economy into a weapon to achieve
trade, diplomatic and security objectives, the administration
has ensured domestic firms would be hit in the resulting
Experience over the last quarter century suggests the only
reliable way to narrow the trade deficit is to push the U.S.
economy into a recession, so the administration should be
careful what it wishes for.
BLAMING THE FED
The White House has blamed the Federal Reserve for raising
interest rates too aggressively and causing the economy to slow
and is exerting maximum political pressure for significant
interest rate reductions.
But it is not obvious the Fed has contributed much to the
slowdown or that it can do much to reverse the deceleration if
the administration keeps escalating the trade wars.
The economy’s deceleration has been contemporaneous with the
imposition of successive rounds of tariffs rather than changes
in interest rates.
Bond and equity prices, too, have reacted more to the steady
ratcheting up of the trade war rather than interest rate policy.
The Fed cannot narrow the trade deficit, even if it cut
interest rates aggressively, since the deficit is rooted in the
savings-investment gap and differential growth rates between the
United States and the rest of the world.
If the Fed cut rates, the principal monetary transmission
channel would be through stimulating interest-sensitive business
and housing investment, which would worsen the deficit.
In theory, the Fed could cut interest rates and resume its
bond buying programme, with the aim, directly or indirectly, of
weakening the exchange rate and boosting exports and well as
helping import-competing firms.
But the exchange rate would only weaken if other central
banks did not match the Fed’s interest rate reductions and bond
buying, which is unlikely.
Given most major U.S. trading partners are experiencing an
even more severe slowdown, it is improbable they would refrain
from cutting interest rates or willingly let their own
currencies appreciate and lose competitiveness.
If the other major central banks all cut interest rates and
resumed bond buying, the U.S. currency would most likely
appreciate rather depreciate.
The U.S. economy tends to be more responsive to monetary
stimulus than the euro zone, Japan, China and other major
So if U.S. interest rates were cut, and it had the intended
effect of boosting equity valuations and stimulating domestic
investment, the most likely outcome would be to strengthen the
dollar and widen the trade gap.
The bottom line is that the White House’s economic policies
are inconsistent. The administration cannot have strong growth,
a rising equity market and a narrowing trade deficit while
waging a trade war of attrition.
- Global economy is probably in recession (Reuters, Aug. 7)
- U.S. and China talk as manufacturers slump (Reuters, Aug.
- Trade war rebounds on the United States (Reuters, July 9)
- U.S./China trade sanctions will be costly but likely
ineffective (Reuters, May 23)
(Editing by Hugh Lawson)
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