Why ‘America First’ Trade Policies Will Face an Uphill BattleBy
Dollar strength makes it difficult to slow imports as desired
Proposed policies risk provoking tit-for-tat, could backfire
Soybeans? So what. The anticipated collapse in legume exports that helped dent U.S. growth in the fourth quarter masks the key headwind from trade: surging imports.
That’s a trend that works against President Donald Trump, who has highlighted the U.S.’s trade deficit -- especially with Mexico and China -- as an economic shortcoming. Yet his favored policy remedies risk misfiring, according to Brad Setser, senior fellow at the Council on Foreign Relations, while the dollar’s strength exacerbates the imbalance.
Last week’s gross-domestic product figures show that at the same time as the incoming Trump administration was pledging to put America first, the U.S. economy stepped up its support for the rest of the world. Net exports subtracted 1.7 percentage points from GDP growth in the final quarter of 2016, according to the advance estimates; the largest drag from trade in six years.
"You can always try to introduce barriers or restrictions at the border to discourage meeting U.S. demand out of imports -- but with the dollar strength you’re essentially fighting economic incentives, and the tide," Setser said in an interview.
The president’s preferred flavor of protectionism skews toward import tariffs, while the House Republicans’ plan calls for a border adjustment tax to advantage exporters.
Yet policies that focus on increasing domestic demand in countries that run trade surpluses -- such as China and Germany -- would likely be more effective in reducing the U.S. current-account deficit than any trade barriers, according to Setser.
It’s not obvious that the U.S. is well-positioned to encourage such changes from other nations, suggesting either domestic politics need to shift or multilateral institutions need to advocate more forcefully for measures that boost demand, he said.
The risk is that any protectionism pursued by the new administration blows back, with countermeasures enacted by other governments crimping U.S. shipments abroad by more than they curb imports.
"The more you push back on the imports, the more it could potentially hurt on the export side," he said, alluding for the potential of tit-for-tat measures from other governments. "It’s difficult to fight the incentives created by the dollar strength."
Perhaps the only surprise about this big bite from trade is that it didn’t arrive sooner -- particularly in light of the broad appreciation of the U.S. dollar since the middle of 2014.
The drawn-out inventory correction that commenced shortly into the greenback’s ascent is likely to have slowed the expected boost to imports. Going back to the dawn of the new millennium, the quarterly contributions to GDP growth of inventories and imports tended to be negatively correlated -- when imports increase (and increasingly subtract from growth), inventories add to growth, and vice versa.
But imports lagged even taking into account the effects of the rising greenback and inventory drawdown, the economist said, so this mean reversion for import growth only adds to the forces working to stymie President Trump’s professed policy objectives.