U.S. trade policy has not come under such scrutiny in many decades as now. When dealing with international economic issues the Prairie Economist first turns to one of the global experts on international trade. Robert Z. Aliber is Professor of International Economics and Finance Emeritus at the University of Chicago Booth School of Business.
He is co-author of Manias, Panics, and Crashes: A History of Financial Crises, 7th Ed. In 2006 Professor Aliber was the first person in international trade and finance to successfully predict a coming disaster in the mortgage market worldwide. He has been a good friend and mentor for decades.
The Prairie Economist asked Professor Aliber some questions to help give some foresight to Banking Exchange readers. An edited summary follows.
Q. What is your view of the White House position on trade?
Professor Aliber: President Trump’s initiatives to reduce the U.S. trade deficit should be applauded because they may forestall further job losses in U.S. manufacturing. Yet his approach is unnecessarily confrontational, and his comment that “trade wars are good and easy to win” is naïve at best. His initiatives toward washing machines, steel, and aluminum confuse the generic problem.
Q. What do you mean by “confuse the generic problem”?
Aliber: Some of the U.S. trading partners have followed “beggar thy neighbor” currency policies with specific excesses in a few commodities.
Q. So, this trade policy is an attempt by one nation to remedy its economic problems by means which tend to worsen the economic problems of other countries. Can any good come from this?
Aliber: The good news is American consumers have benefited from the low U.S. prices for imports resulting from cheap foreign currencies, which are comparable to export subsidies. The bad news is the United States has lost about three million manufacturing jobs because a large number of U.S. trading partners have maintained low prices for their currencies and have adopted other intra-country protective measures to promote exports and reduce imports.
Q. The loss of 3 million jobs is significant, and there is more than loss of workers, isn’t there?
Aliber: Most of the American workers displaced by the rapid increase of U.S. imports more than U.S. exports have moved into the service sector; these workers’ real incomes have declined. The profit rates in the U.S. firms producing exports and import competing goods have been depressed, making thousands of firms go out of business. Taxable incomes in the U.S. have increased less rapidly because of the increase in the U.S. trade deficit, which has eroded our tax base and contributed to the more rapid increase in the U.S. fiscal deficit.
Q. Can you give an example of past and current trade policy?
Aliber: There is a lot of chatter that the Trump administration will adopt a 25% tariff on U.S. imports of washing machines from South Korea. South Korea is an amazing success story. It has a current account surplus of nearly $80 billion, more than 5% of its GDP. South Korea provides an excellent example of trade policy that the U.S. faces.
The U.S. is one of a handful of countries with a significant trade deficit. If the South Korean trade surplus were smaller, the U.S. trade deficit would be smaller, and there would be more jobs in U.S. manufacturing.
The central bank in South Korea buys U.S. dollars to limit the increases in the price of its currency, the won. If market forces set the price of the won so that the country’s trade were more or less balanced, the price of the won would be 20% higher, and U.S. prices of Samsung TVs, Kia and Hyundai autos, and Lucky washing machines would be significantly higher.
South Korea has been an important ally of the United States for more than 60 years—30,000 American military personnel are stationed there.
Yet the Trump administration’s adoption of a tariff on U.S. imports of washing machines is a blunt trade policy, rather than targeted strategic trade policy.
Instead of this tack, the U.S. government could negotiate a commitment from the Seoul government to reduce its trade surplus by 20%-25% for each of the next five years. This targeted commitment strategy would become a model for negotiating similar commitments from other U.S. trading partners having large trade surpluses.
By contrast, the U.S. could continue to target an across-the-board tariff towards imports from countries continuing to pursue beggar-thy-neighbor policies.
Q. Your solution makes a lot of sense. Yet what is your view of a possible trade war and the consequences?
Aliber: The likelihood that the Trump tariffs on washing machines, steel, and aluminum will start a trade war is small. Most foreign countries have large trade surpluses with the U.S. They have much more to lose if they retaliate by raising tariffs on imports from this country.
The consequences are several: The investor demand for U.S. dollar securities would decline more rapidly because of an increase in anti-Trump sentiment. This would lead to a further fall in the price of the U.S. dollar, quickening increases in the U.S. inflation rate, and resulting in a more rapid decline in U.S. stock prices.
My summary of the discussion
Small impact on trade, less investor demand for U.S. securities, a fall in the U.S. dollar, an increase in U.S. inflation rate, and a decline in U.S. stock prices—these are all among the potential consequences looming.
The result is higher rates for loans and deposits. Also, those banks and credit unions in markets adversely affected by manufacturing job loss need to be prepared for a declining marketplace and subsequent loan delinquencies.
It’s possible that benefits from tax reform and infrastructure investments can counter some of these trade consequences.
2018 is turning out to be a very interesting year.
(Mike will respond to questions at [email protected])