The world prepares itself for the Donald Trump boom
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The world economy will enjoy two years of abundance and it is all thanks to Donald Trump. That was the gist of this week’s forecasts from the IMF, dominated as they were by the US president’s tax cuts and their inevitable consequence: a big rise in the US current account deficit. The president who hates trade deficits is about to increase them massively. Managing the consequences will be a big challenge for the global economy.
In its latest World Economic Outlook, the IMF predicts global growth of 3.9 per cent in 2018 and 2019. That is an upgrade of 0.2 percentage points since the fund’s last round of forecasts and would be the best outcome since 2011. Half of the upgrade is due to the global effects of Mr Trump’s stimulus. The outlook really does look promising — especially if you are an Asian exporter.
Mr Trump’s stimulus will generate strong growth at home but it has large global effects because the US is already so close to full employment. His tax cuts and spending plans mean the US is on course for budget deficits of around 5 per cent of gross domestic product.
Create a whole lot of extra demand when there are few unemployed Americans to satisfy it and the natural result is to suck in imports. The stimulus may also force the US Federal Reserve to raise rates, in order to prevent the economy from overheating, which will mean higher interest payments on debt to foreigners. As a result, the IMF forecasts the US current account deficit will widen by a full percentage point between 2017 and 2019, to 3.4 per cent of GDP. It is an inescapable consequence of Mr Trump’s policies.
Demand leakage from the US stimulus will be a big boost to the rest of the world. But it also poses difficult questions for surplus countries such as China, Japan and South Korea. Mr Trump is unlikely to respond to higher US trade deficits with a cheerful tweet of congratulation. He is even less likely to blame himself. There is also the possibility that US inflation will pick up sharply, causing the Fed to stamp on the brakes, with painful consequences for the financial sector and the whole world economy.
We already know Mr Trump’s answer to a trade deficit: he has put tariffs on steel, supposedly to protect US national security; proposed a large package of tariffs on China; and he is putting pressure on US allies from Canada and Mexico to South Korea and Japan to renegotiate trade deals. When US deficits with these countries widen, he is likely to respond with more of the same.
The trouble with his strategy is trade barriers have almost no effect on trade deficits. Rather, they reduce the overall volume of trade and shift it about. As Joseph Gagnon of the Peterson Institute points out, countries with low trade barriers such as Switzerland and Singapore have some of the biggest trade surpluses, while heavily protected Brazil and India have run deficits. What actually decides a current account deficit is the difference between a country’s savings and investment. With his stimulus, Mr Trump is making a determined effort to widen that gap in the US.
Given this, it makes little sense for America’s trading partners to respond to Mr Trump’s pressure with countermeasures. The US trade deficit is going to widen come what may. The trick is to seize your share of the export demand while mollifying Mr Trump with tactical concessions so the “master dealmaker” can declare himself victorious. South Korea has done this with particular skill. In exchange for some fairly meaningless promises on currency management and trade in cars, Seoul has renegotiated its US trade deal and won exemption from the steel tariffs. Now it is free to enjoy the fruits of US trade.
Japan seems willing to absorb Mr Trump’s steel tariffs but stonewalling the US president is a dangerous game. China is too large to avoid a collision easily. Several countries with egregious current account surpluses, such as Singapore and Taiwan, seem to have escaped his attention altogether, while Germany and the Netherlands are safely ensconced in the eurozone.
A wider US deficit will increase the imbalances that were such a feature of the global economy in the early 2000s. The IMF plaintively asks Washington for a “medium-term plan to reverse the rising ratio of public debt”. It is most unlikely to get one from Mr Trump. Tighter financial regulation should prevent capital flows to the US from turning into excess on Wall Street. But US trading partners can also help by keeping imbalances to a minimum.
The fact that China is no longer holding down the renminbi should help to avoid a repeat of the 2000s, but other Asian countries with big surpluses should let their currencies rise. And greater public investment in Germany would help balance not just the eurozone but the world economy.
Mr Trump’s protectionist instincts are often described as a threat to global prosperity. For the next two years, however, his stimulus means we will be living with a Trump boom. Let us hope the contradictions inherent in his policy do not end with a Trump crash.
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