How Trump Could Accidentally Fuel a Global Trade Boom
(Bloomberg) -- Far from jolting the U.S. into a protectionist lurch, might President-elect Donald Trump unwittingly help buoy global trade next year?
Here’s one scenario to mull over: A strong dollar and a tight U.S. labor market, combined with Trump’s proposed fiscal plans, may fuel a rise in net U.S. imports in 2017, a boon for commodity exporters and goods manufacturers such as China—in defiance of the Republican’s protectionist vows on the campaign trail.
That’s the view advanced by Gabriel Stein, a developed-market analyst at Roubini Global Economics LLC. He reckons the stars are aligning for a broad-based pickup in investment activity that will see a rise in America’s current-account deficit next year, as all three domestic players—the public sector, households, corporations—draw down on their savings.
“The policies of the Trump administration are likely to lead to a strong dollar and a widening U.S. current account deficit,” Stein notes in a report last week. “Some—exporters to the U.S. (Canada, the Eurozone, China, Korea), oil and commodity exporters—will benefit to a greater or lesser degree.”
Stein draws this perspective from what’s known as sectoral financial balances. Put simply, national current accounts reflect the interaction between savings and investment; the amount saved in an economy equals the amount invested, as a matter of accounting. If corporate America invests, for example, and neither the household nor the public sectors increase their savings by a corresponding level, the current account balance must, by definition, fall into negative territory, mirroring a rise in net inflows of savings from abroad.
This view—that the government influences the savings and investment balances of households, businesses, and foreign trading partners—took center stage in trade-deficit economies during the austerity debate that followed the 2008 financial crisis. Proponents argued that the private sector’s desire to increase their net saving ratios necessitated corresponding budget deficits to offset the former’s savings impulse—thereby effectively solving the paradox of thrift.
Fast-forward to 2017: There’s a new question for economists. How would an increase in the U.S. budget deficit affect the American private sector’s savings impulse, and how would this influence global aggregate demand?
“Expanding the government deficit should fund higher net financial balances in the non-government sector, private and foreign,” says Naufal Sanaullah, trader and founder of the website MacroBeat. “If Trump implements no material trade barriers, then part of the higher government deficits can flow to higher foreign net financial balances—equivalently, a larger U.S. current account deficit—while the rest pads private-sector balance sheets.”
Stein foresees an uptick in U.S. import demand next year driven by the bullish outlook on the public and private-sector investment cycle.
He sees the corporate sector’s financial surplus, at 1.9 percent of GDP in the third quarter, narrowing next year, buoyed by fiscal stimulus and tax reform plans. Meanwhile, households are also likely to run down their balances, at 0.7 percent of GDP, driven by higher growth expectations and greater borrowing to lock in low interest rates, according to the Roubini Global Economics analyst, who first dove into the issue in a report last month.
With all three domestic sectors therefore likely to reduce their savings in 2017, the U.S. current account deficit will widen, Stein concludes.
Even without a fiscal shift, there’s an argument U.S. economic activity may boost external aggregate demand next year. “We have a strong labor market and we have a resilient economy,” Janet Yellen, Federal Reserve chair, stated after this month’s decision to hike interest rates, suggesting the U.S. economy could achieve full employment in the absence of fiscal stimulus.
The strengthening labor market may thus finally reach a level at which it spurs businesses to ramp up production and investment. At the same time, upward pressure on wages, in light of diminished slack in the economy, would boost the purchasing power of the $13 trillion U.S. consumer gorilla, triggering, in theory, a positive demand impulse for the rest of world in the form of accelerating imports.
But that all hinges on the outlook for free trade. “I don’t think we will see a flow-of-funds-driven boom via the current-account channel unless trade remains open and tax cuts and fixed-investment money creation are used to consume imports,” Sanaullah says.
And then there’s the Trump-fueled dollar. While the greenback’s mid-2014 breakout hasn’t been accompanied by a material rise in U.S. imports, this time might be different. Since the election, the real-effective exchange rate, the dollar’s trade-weighted value vs. a basket of other major currencies, has risen 4.6 percent, according to Barclays Bank Plc, a sharp level of adjustment in the span of seven weeks. The dollar’s spirited strength, therefore, may reshape the outlook for trade: A 10 percent move in the exchange rate is associated with a shift in the trade balance to the tune of 1.5 percent of GDP, according to the IMF.
“Discussions about trade often tend to focus on trade policy, not the actual trade flows,” Brad Setser, a senior fellow at the Council on Foreign Relations in New York, noted in a blog post last month. “But trade flows—and the trade deficit—are what matters for total jobs in the tradables sector, and changes in the value of the currency have a big effect on the level of exports and thus the size of the trade deficit.”
An increase in the U.S. trade deficit would further fuel the clamor for protectionist policies in a Trump administration. Still, the consensus view is that a material shift in the deficit remains unlikely. The U.S. current account deficit will barely budge over the next two years, staying at this year’s level of 2.6 percent of GDP in 2017 and edging up to 2.8 percent in 2018, according to median projections in a Bloomberg survey.
Legislative hurdles to the implementation of sweeping structural and fiscal reforms may account for analyst caution, as well as the challenge to figure out the direction of economic winds next year, from the dollar’s real level to import trends.
“We really have no way of knowing what impact Trump will have on the trade balance,” says George Pearkes, macro strategist at Bespoke Investment Group. “I think he’s going to reduce gross flows, but the impact on the balance is really not straightforward,” citing the complexity involved in forecasting the net outlook for savings and investment flows.
One thing’s clear: The world, in effect, is crying out for a sharp rise in the U.S. current account deficit. The dollar’s bull run is tightening international financial conditions and crimping demand in emerging markets, given tighter liquidity.
“The strong dollar is already choking the global economy, and so a further strengthening would only add stress and weaken global aggregate demand growth,” says David Beckworth, a research fellow at the Mercatus Center at George Mason University in Arlington, Va.
The U.S.’s failure to ramp up imports next year, therefore, would exact a heavy toll on the global economy, analysts at Macquarie Group Ltd., led by Viktor Shvets, concluded in a report last week.
“If the U.S. proves itself unable to generate sufficient momentum to widen current account deficits and inject stronger demand and dollars into the global economy (thus keeping dollar supply low) and [bond] spreads widen, dollar appreciation could accelerate, curtailing global demand and liquidity.”
To contact the author of this story: Sid Verma in London at firstname.lastname@example.org.