Why the U.S. Trade Deficit Keeps Growing
Ever since U.S. President Donald Trump came to power, his administration has focused on shrinking the trade deficit, pressuring foreign countries to reduce barriers to American exports. Yet the government recently reported that the deficit rose significantly in 2018, to $621 billion. What gives? Shouldn’t Trump’s efforts in China and elsewhere have some effect on trade with those countries, and hence on the overall U.S. trade imbalance? Unfortunately, that’s not how it works. The U.S. trade balance depends primarily on how much the country as a whole spends, earns, saves and invests. Americans collectively spend more than their income, which means that the country’s savings do not cover its investment needs. To make up the difference, the country must borrow from abroad – that is, foreigners need to increase their holdings of dollar-denominated assets. These capital inflows are the flip side of the trade imbalance. Put another way, savings imbalances lead to trade deficits. If you think about it like this, you’ll see that last year’s increase in the deficit was preordained at the end of 2017, when Trump signed the Tax Cuts and Jobs Act into law. Together with higher caps on federal discretionary spending, the legislation sharply increased the government budget deficit. This widened the gap between domestic saving and investment, requiring even greater foreign capital inflows – and a bigger trade deficit – to maintain balance. But wait a minute. If trade barriers are coming down faster abroad than in the U.S., shouldn’t this help? At the margin, perhaps: U.S. exports might go up in the relevant countries. But the growing federal budget deficit has a greater effect.
Germany’s Economy Has Already Lost About $38 Billion to One-Offs
Temporary factors cost the German economy about 34 billion euros ($38 billion) in the second half of 2018, when it tipped dangerously close to a recession. A simulation by the Kiel Institute for the World Economy looked at the state of industry while stripping out the effects from one-offs that dented growth. Without those, the economy could have expanded by about 0.5 percentage point more in each of the final two quarters of last year. What’s unclear is how much more will be added to that bill in the coming months, with some issues, particularly in the auto industry, lingering into 2019. A change in car-industry regulations last summer, low water levels on the Rhine river, and a curious breakdown in pharmaceutical output were seen as among the culprits behind the industrial slump. Now, global uncertainties and capacity constraints might challenge a meaningful rebound, and the institute forecasts expansion of only 1 percent in 2019. Economists from the Bundesbank to the European Central Bank have scratched their heads over the slowdown in Germany and the euro area as they try to gauge whether growth is entering a more protracted shift. The spell of temporary factors might not be over. Earlier this week, Germany’s economy ministry said car-model changes and strikes at suppliers emerged as new challenges, after factory orders and output took an unexpected hit in January. But there’s also been some good news. Water levels on the Rhine have risen again after last year’s issues hurt industries from steel makers to petrochemical companies.
China Vows to Stick to Targeted Stimulus Amid Jobless Pressure
China will stick to its current targeted economic support strategy and resist the temptation to engage in large-scale stimulus like quantitative easing or a massive expansion in public spending, Premier Li Keqiang said. “We certainly need to take strong measures to face the downward pressure,” Li told a news conference Friday at the close of the annual National People’s Congress session in Beijing. “An indiscriminate approach may work in the short run but may lead to future problems. Thus it’s not a viable option. Our choice is to energize market players.” China’s annual gathering of leaders that started last week has delivered a raft of policy initiatives, while maintaining a focus on using tax cuts and other “targeted” measures to address the weakness in output. China’s deepening slowdown has pushed unemployment higher, intensifying pressure on that calibrated stimulus strategy. Li reiterated the government’s new emphasis on preventing large-scale job losses in the wake of the slowdown, a day after data showed the unemployment jumped to 5.3 percent in February, the highest level in two years. He said the “employment first” strategy put jobs on the same level of priority as fiscal and monetary policy. He also elevated the number of jobs the economy will create “in practice” this year to 13 million from the 11 million target announced last week in his economic policy report. Tax cuts announced last week could exceed the proposed plan of 2 trillion yuan ($298 billion) this year. Included in that total is a cut of 3 percentage points to the top bracket of value-added tax aimed at benefiting the manufacturing sector. Policy makers have also cut bank reserve requirements multiple times since last year, releasing liquidity for lending. Li indicated use of that tool would continue.
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