The trade deficit with China is in Trump's crosshairs and the Trans-Pacific Partnership (TPP) looks set for a swift demise. But is there a way to make the U.S.'s Faustian arrangement with China - that the US will run a large deficit and allow China to grow faster than it otherwise would as long as China recycles a portion of its surpluses back into US debt AND appreciates its currency against the USD- still work? With TPP, are there parts of the agreement that may be in the US' interest to keep? The parties to TPP represent 800mm people and 40% or the world's output. If nothing else, that's “big-league”.
Trump was elected, at least in part, by focusing on the US's trade deficits with China and the rest of Asia. Overly generous agreements made in the spirit of “free-trade” have led the U.S. to run massive trade deficits while Asian competitors have taken a more mercantilist approach. The US has not been overly concerned with keeping these deficit levels in check partly because Japan, which meaningfully appreciated its currency in the 1980s with the Plaza Accord, set a precedent for a working model. The last part of the Faustian arrangement, appreciating the currency of the surplus country versus the dollar, is key. Depreciating the dollar helps the US monetize its debt and provides a self-correcting mechanism to address imbalances, in lieu of the gold standard which existed when the concepts of “free trade” were first conceived.
One could argue that trade deficits have harmed the United States and consistent, large global imbalances have had a destabilizing effect on the global economy. But how realistic is it to think that the US could turn a few knobs and completely balance trade with China and the rest of Asia? Would we even need to? US trade deficits have produced extraordinary global economic prosperity and wealth creation over the past 30 years. If they were to be entirely eliminated now, a range of unsavory scenarios could unfold, from insufficient dollar liquidity, causing economic stagnation, to economic depression and destabilization in China, to higher inflation and interest rates in the US.
A more moderate approach to trade seems in order, one focused on reining in large imbalances, combined with well-conceived reductions in trade barriers and taxes, better enforcement and a healthy respect for both sides of the trade relationship. At the same time, the US would do well to be more strategic and focus on what “non-trading alpha” it can bring to trading relationships, beyond fulfilling the buyer role in a mercantilist mindset. The more Asia gains access to the latest research and advancements in labor protection, the environment, intellectual property and corporate governance, the more it likes.
If the TPP can't survive, can we hold out any hope for some comprehensive framework that could eventually evolve into a fully regional, APEC-wide agreement to include China? What will be the best way for the US to help Asian countries reduce forced and child labor and employment discrimination while improving workplace health and safety, minimum wages, and limits on hours of work? What is the US' plan to help strengthen health and medical supply systems in Asia by promoting government transparency and due process in medical supply procurement? Does the US want to play a role to reduce illegal over-fishing, wildlife trafficking and illegal logging or increase adoption of environmental technologies including solar panels, wind turbines, waste water treatment, air pollution control and air and quality monitoring across the region?
Massive global imbalances are unsustainable and need to be addressed, but Trump and his team will be better off pursuing a measured, holistic approach to its relationships in Asia rather than riding herd on trade deficits alone.