Mike Segar/Reuters
President Donald Trump has warned that discussions with his Chinese counterpart ,Xi Jinping, in Florida this week will be “very difficult,” in large part because of disagreements over trade. But before Trump can shrink America’s lopsided trade deficits — with China or anyone else — he first must recognize what’s driving them.
Unlike in the past, most deficits today have little to do with currency manipulation or unfair tariffs. In the 19th century, import tariffs were the main instrument of trade intervention, increasingly supplemented during the 1920s and 1930s by currency machinations.
This continued well into the 20th century. Even as international agreements — usually championed by the United States — began to restrict the use of tariffs in the post-Bretton-Woods era, Europe and Japan, taking advantage of Cold War exigencies, protected domestic industries for decades by keeping their currencies undervalued relative to the dollar.
During this time, trade imbalances mostly were determined by direct differences in the cost of traded goods, while capital flowed from one country to another mainly to balance trade flows.
Today, however, conditions have changed dramatically. Capital flows dwarf trade flows, and investment decisions by fund managers determine their direction and size.
This has profound implications for trade. Large, persistent trade surpluses such as the one China runs with the United States no longer are the consequence of explicitly mercantilist measures. Instead, they’re driven by policies that distort domestic savings rates by subsidizing production at the expense of households.
Take Germany, for example. After a decade of trade deficits and high unemployment, worried leaders in Berlin implemented labor reforms in 2003-05 whose main effect was to weaken wage growth. As unemployment dropped and business profits surged, the reforms also shrunk the share of national income allocated to ordinary households, driving down the consumption share as well.
| By Michael Pettis Bloomberg News |
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