The G7 summit will take place next month, and Donald Trump will have the opportunity to explain his views on trade and speak about multilateral economic and political foundations of the world. This is a good chance for everyone to see where the US and POTUS stand, but some foreign leaders believe that he may miss this opportunity because of the midterm elections which take place in November.
Trump is smart enough to realize that the world affairs, and his response, will determine his faith in the seat of power. Wall Street keeps reminding him of that with asset price changes in the middle of tax cuts, jobs, and income gains, etc. These issues need to be dealt with as soon as possible, and tweets will not help. We need a clear strategy and a call to action to keep America’s interests at the top.
Speaking of trade, the US has a solid position to start with. Against them are states who are presenting themselves as the defenders of multilateralism and free trade, but these people are actually responsible for excessive surpluses at the expense of America and the rest of the world. For instance, the combined surplus of Germany and China is $463.4 billion. Meanwhile, the US trade deficit on the same external accounts was $466.2 billion. These three countries account for almost 40% of global demand and output. It is a textbook example which shows that the balance of payments on the world scale is zero.
Furthermore, the trade surpluses of China and Germany could finance American deficits, by purchasing the US government debt instruments. If you don’t understand it, don’t worry, it is a slightly complicated process. What we mean by this is that the Chinese and the Germans would increase their net foreign assets, by recycling the dollars America paid them for their services and products. Meanwhile, the US is accumulating net foreign debt. At the end of 2017, this debt was at $7.8 trillion. Why is this important, again?
A large trade deficit shows clearly that the policy relies on external demand in order to generate profit and increase the employment rate. These are so-called “beggar-thy-neighbor” policies because the trade partners are keeping the country that is chasing this goal alive. Moreover, these countries break the G-20 recommendations to balance trade accounts so that the world economy remains stable.
Also, China and Germany seem not to care about trade complaints presented by the US in recent months. In the first quarter of this year, China and the EU, led by the Germans had 62.4 percent of America’s trade gap. And these countries disparaged the US just because they wanted relief from soaring debts and deficits. And this attack on the US doesn’t stop. Recently, the International Monetary Fund spoke in Russia about “the darkest cloud” over the world economy caused by “determination of some (the US) to actually rock the system that has actually presided over the trade relationships that we have all undertaken and enjoyed to some extent over the last many decades.”
The G-7 meeting is the right place for Trump to solve this issue, or at least address it. Especially now, that his trade opponents are changing their policies. Angela Merkel, the German Chancellor, visited Beijing for the 11th time and found an alternative to the German export sales that are currently on the American markets. What the US needs to do at this point is make sure that the EU and China accept the cooperation to balance out the trade accounts with America. The difficult job awaits Donald Trump and should he fail, he will not be able to rely on another tax cut to rev up financial markets as he anticipates the November’s election.