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American economy on sound footing but Trump needs to be cautious about trade misconceptions

US President Donald Trump’s unpredictable approach to policymaking has fueled widespread concern about where the United States is headed. Yet America’s stock market has performed well since Trump’s election, faltering only when his administration’s political future appears to be in doubt. That is no accident: On the economic front, Trump’s approach might have some redeeming qualities.

From the outset, the Trump administration has maintained a pro-business attitude, exemplified by his commitment to deregulation, raising hopes among investors of a boost to the US and global economies. Admittedly, efforts to roll back environmental protections will ultimately do serious harm to the US, even if they allow some companies to improve their bottom line in the short term.

But the Trump administration’s eagerness to free financial markets of excessive regulation may ultimately prove beneficial for all. When regulations become too cumbersome, they can do more harm than good.

Another reason for optimism about the US and world economies is rooted in the Trump administration’s US$1 trillion plan to rebuild America’s infrastructure.

Unfortunately, Trump’s equivocation about the white supremacist violence in Charlottesville, Virginia, earlier this month destroyed the last traces of goodwill he may have had in the US Congress. With two business advisory councils having been disbanded in the wake of the Charlottesville incident, following an exodus of CEOs critical of Trump’s response, plans for an infrastructure advisory council have now also been dropped.

But political disarray is far from the only potential threat to Trump’s economic success. His administration’s trade policy is based on serious misconceptions. Trump and his advisers seem to believe that only balanced bilateral trade is fair and, therefore, desirable. In fact, such balance is difficult to achieve in an open trading system.

After World War II, high inflation in Japan undermined confidence in the yen’s stability, leading many Japanese to barter. Tokyoites, for example, traded their precious garments, from wedding dresses to fine kimonos, with rural farmers for rice and vegetables. The system worked, because, at that moment, supply and demand happened to be exactly matched.

But that balance was fundamentally coincidental; it could not be expected to endure changing economic circumstances. That is why barter economies are so inefficient — and thus obsolete. Modern systems use money, because, as a store of value, it serves as a kind of buffer.

NAFTA’s case

As Trump attempts to renegotiate the North American Free Trade Agreement with Canada and Mexico, he would do well to remember this. As it stands, his administration seems eager to impose limits on US imports from NAFTA countries. If the only thing that changed about NAFTA members’ behavior was that they exported less to the US, American workers could benefit, with US farmers or manufacturers — including much of Trump’s own electoral base — becoming more competitive within the US market.

But that is not going to happen. Instead, America’s NAFTA partners will respond strategically to limits on their exports, adjusting their trade relationships with each other and with others, in order to mitigate the impact of US import controls. Protectionist behavior by the US could even trigger a trade war, as occurred after the introduction of the Smoot-Hawley Tariff in 1930, in which case everyone would lose.

To develop a more effective trade policy, the Trump administration must acknowledge what current-account balances are and are not. A better way to understand a current-account surplus (or deficit) is as a measure of a country’s saving (or dissaving) toward the future. A country’s current account reflects how it allocates its income between the present and the future. If the US wants to reduce its own deficits, it should start saving more.

The US is undoubtedly facing serious political challenges, exacerbated by a mercurial, polarizing, and brash administration. But, economically, the country remains on sound footing. If US policymakers genuinely want to strengthen the economy, they are in a good position to do so, benefiting not just the stock market, but ordinary Americans as well.

Koichi Hamada is Professor Emeritus at Yale University. Copyright: Project Syndicate, 2017. Shanghai Daily condensed the article.

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