How does the national debt harm America
Free trade versus protectionism
Donald Trump justifies his protectionist trade course with the USA's minus in the trade balance with China and Europe. Berlin economist Jan Priewe analyzes the same problem before other US presidents.
Jan Priewe is a Senior Research Fellow at the Institute for Macroeconomics and Business Cycle Research (IMK) in the Hans Böckler Foundation. Until 2014 he was professor of economics at the Berlin University of Applied Sciences.
Led by German manufacturers, the EU exported automobiles worth 46.6 billion euros to the USA in 2016. Europe only bought cars there for 10.3 billion euros - and above all vehicles from Daimler, BMW and Volkswagen, which have their own plants in the USA. (& copy dpa)
In 2017, the US had by far the largest foreign trade deficit in the world. In absolute numbers it was 552 billion US dollars, which is 2.85 percent of the gross domestic product. Is that a problem for the US? Yes and no - it depends on the economic and political evaluation. Donald Trump uses his own rhetoric to rate it as "flooding" the US markets with Chinese and European goods - at the expense of employment in the USA, especially in the Midwest. The USA would be disadvantaged, especially by China and the European Union (EU) - and here especially by Germany.
Jan Priewe (& copy private)A trade deficit means that a country buys more goods and services than it produces itself. So it is associated with job losses. A deficit country also has to go into debt abroad. That is why most countries in the world try to avoid foreign trade deficits, especially chronic deficits. However, the USA has had this since the early 1980s. Since then, they have been the largest net debtor country in the world, having amassed more liabilities to the rest of the world than they have receivables. The nature of the US foreign trade deficit problem will be explored in more detail after we look at the facts.
The factsIn 2006 the US trade deficit was the largest to date, at 5.6 percent of the US gross domestic product (Fig. 1). After the 2008/09 financial crisis, it shrank to around 2.5 percent. The US bilateral deficit with China, if the figures from the US State Bureau of Economic Analysis (BEA) are to be believed, amounted to around 335 billion US dollars in 2017 (Fig. 2). That's 61 percent of the total US deficit. The US has a comparatively small deficit of 104 billion US dollars with the EU, i.e. 19 percent of the total US deficit. The lion's share goes to Germany with a bilateral deficit of 61 billion US dollars, about twelve percent. If the BEA figures are correct, trade with China and the EU together account for 80 percent of the total US deficit.
As for China, there are serious doubts about the BEA numbers. According to the International Monetary Fund (IMF) and the World Bank, China only has a trade surplus totaling 209 billion US dollars or 1.7 percent of Chinese GDP (2017).  That figure would only fit the US's bilateral deficit with China of $ 336 billion - according to BEA statistics - if China had huge deficits with other countries - which it doesn't. Apparently the BEA assumes that China's surpluses are much higher than officially stated. This is countered by the fact that China has fundamentally changed its trade policy since around 2008, away from its extreme export orientation and towards domestic demand (Fig. 3) - if the official figures are correct.
The problems with the statistics have various causes, which are particularly serious in the case of bilateral balances. Probably the most important is that the trade in services is relatively difficult to record, for example in tourism, in Internet services or in imports and exports within multinational corporations. The USA has a large surplus in trade in services and a very large deficit in trade in goods (trade in goods in the statistics).
As far as the EU is concerned, according to official figures from the IMF and World Bank, its surplus is significantly larger than that of China, namely $ 553 billion or 3.6 percent of EU GDP; in relation to the euro zone, it is even a surplus of 4.5 percent. The focus on bilateral deficits is misleading, however, because Germany, for example, has trade surpluses with most countries in the world, which in turn may have bilateral surpluses with the USA. If one takes the indirect effects into account, all that matters is the macroeconomic surpluses or deficits. Germany is by far the country with the highest surplus in the world, measured in absolute terms, surplus world champion.
How bad are the US deficits really?From an economic point of view, chronic deficits in a country's foreign trade are always undesirable, and in many cases even highly problematic. But there are no simple limit values for deficits. Very few OECD countries have chronic deficits. For the United States, there are three main disadvantages.
First, overall employment suffers when imports chronically exceed exports and no form of compensation for the disadvantage is found - for example, a correction of the exchange rate through devaluation. The deficit country is then continuously at a disadvantage compared to the surplus country. President Trump may compare himself to surplus countries like Germany, China and Japan, and also want surpluses. In any case, the impression arises that the surplus countries benefit more from trade globalization than the deficit countries.
Second, given the exchange rate, the deficit country apparently has problems with the competitiveness of its exports. The US has gone through a deep de-industrialization of its economic structure because it has lost market share to China, Germany and many other countries. As a result, employment shrank in old industrial regions, where Trump has a large part of his constituency.  It mainly affects people with low or medium qualifications and the elderly who are no longer sufficiently adaptable. The new innovative jobs are often created in completely different regions, for example in California. Very high incomes are achieved there, for example at the internet giants in Silicon Valley.
Thirdly, deficit countries mostly try to compensate for the loss of competitiveness by increasing budget deficits (“twin deficits” - in the state budget and in the balance of payments) or by increasing private household or business debt. The fact that the USA has been able to achieve relatively high growth in GDP and employment in recent years has above all to do with its fiscal policy: it increased government spending and cut taxes, in other words, it put the reduction in the high debt level on the back burner. For example, the US had a budget deficit of 4.0 percent in 2017, and in 2018 it will likely be over 5 percent. 
The flourishing economy is the basis of the still high approval ratings for Trump. This cannot just go on like this, however, because with almost full employment there will be higher inflation and rising interest rates - not good news for a president who wants to win the next elections again in 2020. Compensation for the disadvantages of the trade deficit through credit-financed private and state spending is therefore limited.
Now one can ask why the US doesn't simply devalue its currency or reduce budget deficits so that demand is no longer greater than domestic production and the deficit is melting away.  The reason for the lack of a devaluation option is a particular dilemma in which the USA - unlike other countries - finds itself. Because the USA is the only country that uses a currency that is recognized everywhere, a world currency in which other countries also hold their currency reserves. The euro, on the other hand, is only a regional currency. To have the most important currency in the world is actually a great privilege: because it allows you to finance trade deficits with your own currency. In addition, many countries invest their currency reserves in the USA (at low interest rates), just as wealthy owners around the world invest a large part of their money there. Therefore, there is no serious risk that the US will no longer be able to service its external debt, even though it is the world's largest net debtor. With all the advantages for the US, this constellation inevitably leads to current and trade deficits. There is no real devaluation option. If the US government cuts the budget deficit, it could cause a recession with global repercussions. Since the domestic economy suffers indirectly from the privilege of "dollars as world currency", there have been tendencies towards trade protectionism in the USA over the past 50 years, but these have mostly not caught on.
Other options beyond devaluation and excessive credit expansion are difficult and tedious. There are three main economic policy measures to be mentioned here: Firstly, the reindustrialization of weak regions, the promotion of new sectors, an energy and transport transition, the expansion of infrastructure and investments in education and training. Second, a top-down redistribution that would stabilize the demand for goods and services without high levels of new borrowing by the state and private individuals. Thirdly, the appeal to the US partner countries in Europe and Asia to help "rebalance" the world economy by limiting their trade surpluses, for example by increasing domestic demand and thus importing more - this has long been the request of the International Monetary Fund, for example. This has long been understood in China, but not for a long time in the EU.
So much for the economic assessment of the US trade deficit. All US presidents in the past and present have been and are confronted with the problems outlined above. However, the current incumbent has his own interpretation of the facts and his specific policy response to the problems. Instead of structural and industrial policy, he chooses protectionism.
Political assessment of the US deficit by the Trump administrationTrump's threatened or already implemented measures of protectionism, unilaterally imposed on trading partners, are extremely dangerous. If there is actually a spiral of arbitrary tariffs, the global economy can suffer severely, including the US itself. US import tariffs make imports more expensive, and countermeasures from Europe and China make US exports more difficult. International value chains, in which US companies are also involved, may be destroyed. Threats and counter-threats create great uncertainty - poison for investments worldwide.
But the crucial point is China. If China were to be hit hard, the growth of the world economy would plummet. Does Trump want that? Probably not. However, there is much to suggest that the US government wants to prevent China from becoming a political and economic world power. China's technological ambitions in particular are a thorn in the side of the US. From this point of view, "America first" specifically means "China second", and this also applies to Europe.
If this interpretation is correct, then, beyond trade deficits and surpluses, it is primarily a question of a global political power struggle. If the US president were to trigger a trade war and, as a result, a global recession that would not spare the US either, his re-election would certainly be in jeopardy. He's probably not going that far. However, he hopes China and Europe will give way. A strategy that is more than risky.
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