US: How to reduce the trade deficit? - NBF

Krishen Rangasamy, Research Analyst at NBF, suggests that with Gary Cohn on his way out, it’s unclear who in the White House will take on the responsibility of advising the President about the intricacies of global trade and the economy in general.

Key Quotes

“You see, reducing the U.S. trade deficit is not as straightforward as it sounded on the campaign trail. America’s trade deficit is a function of savings, the latter likely to remain low because the fiscal stimulus underway stateside will boost spending and hence imports. True, tariffs could cap imports by forcing Americans to consume U.S.-made goods, but they are likely to also hurt exports as trade partners retaliate to some extent. How about forcing trade partners like China to let their currencies appreciate? If history is any guide, the U.S. may not have much success there either.”

“The Plaza Accord of 1985 was meant to help reduce the U.S. trade deficit by forcing Japan to prop up its currency. While the yen indeed appreciated sharply after 1985, the U.S. trade deficit with Japan actually worsened as American demand for “made in Japan” goods remained strong. So how could the White House achieve its objective of shrinking the U.S. trade deficit? America’s trade deficit tends to narrow during recessions. While not our base case scenario, a serious growth slowdown could happen if for example Trump’s tariffs snowball into a full blown trade war that seriously curtails world trade volumes à la Smoot-Hawley. All told, the White House’s stated objectives of a sustained 3-4% real GDP growth and a smaller trade deficit do not seem to be compatible.”