Trump administration trade policy review misses the big picture

Robert E. Scott

Robert E. Scott Senior Economist and Director of Trade and Manufacturing Policy Research, EPI

The Trump administration announced last week that it would sign two executive actions to launch a review of U.S. trade policy. A review of trade policy and its potential to harm U.S. workers is welcome and long overdue. However, the specifics of the review offered by President Trump mean that it is likely to fail to provide any help to American workers, in part because it asks the wrong questions.

The president’s first order requires Secretary of Commerce Wilbur Ross and White House Trade Council to “identify every form of trade abuse and every nonreciprocal practice that contributes to the U.S. trade deficit,” according to the commerce secretary. The report is to be completed within 90 days, with an analysis of the detailed cause of the deficit “by country and major product.” But the trade deficit is not a “product by product” or a “country by country” problem. We know what it is caused by and what should be done about it.

The trade deficit is not a bilateral problem between the United States and individual countries. The U.S. trade deficit is a result of global trade imbalances. There are ten to twenty countries that have developed large, persistent, structural trade surpluses that are distorting trade flows worldwide. The top ten surplus countries are shown in Figure A below. In 2015, these countries, led by China, Germany, Japan, Korea, and Taiwan, had a collective trade surplus of approximately $1.5 trillion. (The figures reported are current account balances, the broadest measure of trade in goods, services and income.)[1] The United States’ current account deficit of $463 billion in 2015 accounted for less than one third of the total surplus accumulated by the big surplus traders. Other countries have also suffered from persistent, structural trade deficits, job losses, and downward pressure on wages, including Great Britain, Brazil, Australia, and Mexico. Attacking the root causes of global trade imbalances will benefit all deficit countries, and not just the United States.

It is also important to note that Mexico is not a country that has maintained large, global trade surpluses. In fact, it has had significant current account deficits in every year since 2000. This analysis shows why bilateral trade data are a poor guide to trade policy development. Measures of each country’s overall trade balance with the world provide a much more accurate and effective basis for identifying global distortions in trade flows. ­

The causes of global trade imbalances are also well known. While dumping, subsidies, and massive amounts of excess production capacity in some industries (e.g. steel, aluminum) and some countries (e.g., China, Korea, Japan) are an important cause of the problem, the single most important cause is currency undervaluation. Countries with larger, persistent trade surpluses have undervalued currencies. Rebalancing of major currencies, last achieved following the 1985 Plaza Accord, is the single most effective way to rebalance global trade flows. Such an agreement is needed to increase (realign) the exchange rates of the major surplus countries shown in Figure A, relative to the U.S. dollar, which is heavily overvalued.

Figure A

Countries with the 10 largest current account balances in 2015 (billions of US dollars)

CountryCurrent account balance
China 600.2
Germany 284.224
Japan 135.58
Korea 105.871
Taiwan 76.165
Switzerland 75.822
Russia 69
Netherlands 64.417
Singapore 57.922
Italy 39.907

 

Note: China's trade balance is reported in place of current account balance due to reported errors in China's broader goods and services trade flows.

Source: International Monetary Fund, World Economic Outlook Database, October 2016

The president’s executive orders on trade also “reflected a marked softening” from the heated trade rhetoric used by Trump on the campaign trail in 2016. The announcement also seems to reflect a search for small, specific, trade actions that could yield “tweetable” trade victories. For example, the president’s second order calls for “enhanced collection” of anti-dumping and countervailing duties, to address the “under-collection” of such duties. White House National Trade Council Director Peter Navarro said that $2.8 billion in such duties were uncollected between 2001 and the end of 2016, or approximately $175 million per year. When compared with the U.S. goods trade deficit, which reached $749.9 billion in 2017, such duty “under-collections,” were small potatoes indeed. While recouping these “missing” duties would be good for injured workers and companies, and would create opportunities for regular announcements of trade “victories,” they will have no significant impact on the overall U.S. balance nor on trade related job losses.

Small victories on unfair trade, while welcome, will not bring about the currency realignments needed to rebalance trade flows. Voters, Congress, and manufacturers should settle for nothing less.

Posted In: Allied Approaches

Union Matters

The Big Drip

From the USW

From tumbledown bridges to decrepit roads and failing water systems, crumbling infrastructure undermines America’s safety and prosperity. In coming weeks, Union Matters will delve into this neglect and the urgent need for a rebuilding campaign that creates jobs, fuels economic growth and revitalizes communities. 

A rash of water main breaks in West Berkeley, Calif., and neighboring cities last month flooded streets and left at least 300 residents without water. Routine pressure adjustments in response to water demand likely caused more than a dozen pipes, some made of clay and more than 100 years old, to rupture.

West Berkeley’s brittle mains are not unique. Decades of neglect left aging pipes susceptible to breaks in communities across the U.S., wasting two trillion gallons of treated water each year as these systems near collapse.

Comprehensive upgrades to the nation’s crumbling water systems would stanch the flow and ensure all Americans have reliable access to clean water.

Nationwide, water main breaks increased 27 percent between 2012 and 2018, according to a Utah State University study.  

These breaks not only lead to service disruptions  but also flood out roads, topple trees and cause illness when drinking water becomes contaminated with bacteria.

The American Water Works Association estimated it will cost at least $1 trillion over the next 25 years to upgrade and expand water infrastructure.

Some local water utilities raised their rates to pay for system improvements, but that just hurts poor consumers who can’t pay the higher bills.

And while Congress allocates money for loans that utilities can use to fix portions of their deteriorating systems, that’s merely a drop in the bucket—a fraction of what agencies need for lasting improvements.

America can no longer afford a piecemeal approach to a systemic nationwide crisis. A major, sustained federal commitment to fixing aging pipes and treatment plants would create millions of construction-related jobs while ensuring all Americans have safe, affordable drinking water.

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