U.S. Losing the Trade War?  Dr. Michael Ivanovitch

KEY POINTS

• Problems of Washington’s incoherent fiscal and trade policies should not be dumped on the Federal Reserve.
• The best course for asset valuations is a Fed’s credit stance scrupulously following its difficult policy mandate.
• Wall Street should ignore the headline-grabbing trade war nonsense and lower the boom on Trump’s total lack of progress on the trade front.
• That has caused a great damage to the U.S. economy by limiting American exports to the EU, China and Japan to a stagnant and wholly inadequate $258.8 billion in the first six months of this year.

“China is killing us” is one of President Trump’s hyperbole meant to exaggerate the economic damage wrought by China in order to pressure the Federal Reserve to give him “bigger and faster” monetary easing.

Sadly, he apparently thinks he found a holy grail in a total non-starter.

The Fed is currently guided by price stability and growth prospects of a fully employed economy growing at an annual rate of 2.5 percent in the first half of this year. That is half a percentage point above its potential and noninflationary growth. At the moment, therefore, the economy is not showing a deflationary bias that would indicate the need for interest rate cuts.

Apart from that, Trump has challenged the Fed’s integrity to the point where that pillar of the American public service cannot cave in and open further the liquidity floodgates just because the president and asset traders said so.

The U.S. is enjoying a fully employed economy because the Fed is still trusted as an administrator of the world’s key currency, providing one of the best and safest investment destinations for global savings, and serving as the only anchor to whatever remains of the international monetary system.

Fed can’t do more, but China can

Is it possible that Trump does not see any American interest, or advantage, in all that? How else to explain his almost daily attacks on the Fed — a highly unusual practice of American presidency.

China is another example of that unusual statecraft.

Starting with a proposition that the “China problem,” however defined, cannot be resolved by military means, logic commands that there can only be a negotiated political solution to the two countries’ peaceful co-existence.

The problem of hugely unbalanced bilateral trade is part of that political solution. But the trade issue needs to be resolved through a negotiating process rather than destabilizing monetary policies aimed at exchange rates and asset prices.

Indeed, China cannot refuse to cut down its excessive and unsustainable trade surpluses on American goods trade. But China will not accept to do that under a humiliating ultimatum that requires economic policy changes and a permanent threat of sanctions.

So, talk to China reasonably about accelerating the current pace of trade deficit cuts. That is a more effective way of supporting the U.S. growth than the Fed’s excessive monetary easing, part of which would leak out to China via an increasing U.S. import demand.

For the same reason, Washington should push for Germany to unlock stronger economic growth within the European Union — a destination for one-fourth of America’s exports.

Germany and Japan are hurting the US economy

In the first half of this year, the EU ran an $84 billion surplus on U.S. goods trades, a 9 percent increase from the year earlier.

Germany accounted for nearly 40 percent of that surplus, with $62 billion worth of exports to the U.S., more than double the amount of American sales to Germany. Yes, German companies rushed into U.S. markets to escape the stagnating economies in Germany and the rest of the EU.

Germany, therefore, is the key to raising U.S. exports to Europe for three reasons.

First, Germany is by far the largest EU economy, accounting for about one-third of the area’s goods and services. Second, the German economy has slowed down between the middle of last year and the beginning of spring this year to an annual growth rate of 0.8 percent. Third, with stable prices, a budget surplus of 2.3 percent of GDP and a trade surplus of 7.4 percent of GDP, Germany has ample room to stimulate domestic demand and rev up economic activity in the rest of the EU.

Instead of working with Germany to expand and open up the markets for up to $400 billion of U.S. exports to the world’s largest free-trade area, Washington has soured the relations with Berlin on trade issues, defense spending, vitally important North Stream 2 gas pipeline and taunts about U.S. military base transfers from Germany to Poland.

Japan is another large trade and security problem for the U.S. Washington is watching its closest Asian ally engaged in a deepening economic exchange and a strategic rapprochement with Beijing, while the U.S. pursues an increasingly hostile Chinese agenda.

In the first half of this year, Japan was running a rising trade surplus of $36 billion with the U.S. and an $18.6 billion trade deficit with China — buying $82.4 billion of Chinese goods, compared with a pitiful $39.5 billion of U.S.-produced merchandise. Japan, presumably, does not find much to buy in the U.S.

Does Trump know about that in the run-up to the G-7 meeting later this month, and an apparently done trade deal with Japan ready for signature next September? And how reasonable is Trump’s policy of seeking to contain China’s influence in the Indo-Pacific region when America’s key Asian ally wants to cash in and thrive on vast and growing Chinese markets?

Investment thoughts

Problems of Washington’s incoherent fiscal and trade policies should not be dumped on the Fed. Markets cannot expect the Fed to do more in a totally unbalanced policy mix, undermined by unsustainably large trade deficits and a fiscal policy firing up a soaring American public debt.

Markets should realize that the best course for asset valuations is a Fed’s credit stance scrupulously following its difficult policy mandate.

Instead of going into a tizzy about headline-grabbing trade war nonsense, Wall Street should lower the boom on Trump’s total lack of progress on the trade front. That has caused a great damage to the U.S. economy by limiting American exports to the EU, China and Japan to a stagnant and wholly inadequate $258.8 billion in the first six months of this year.