Erasing the trade deficit?

By Scott Benjamin

The last time the United States had a trade surplus Terry Bradshaw was playing quarterback for the Super Bowl Steelers, John Travolta was starring as Vinnie Barbarino – the leader of the Sweat Hogs - and Republican President Gerald Ford had pledged to make America energy independent within a decade.

It was 1975, when there were more than twice as any tickets sold for Jaws than any other move released that year.

Wall Street Journal columnist Greg Ip recently wrote that Robert Lighthizer, the trade representative to former President Donald Trump and whose name has been “floated” for positions in a second Trump White House, believes that “penalizing unfair trade is no longer enough. He has a plan to eliminate deficits altogether.”

From Democratic former President Bill Clinton with the North American Free Trade Agreement being signed in 1993 to the start of the Trump administration 24 years later, America embraced free trade.

The theory was that the United States would have access to more markets to sell its exports and also could purchase more low-priced imports.

Ip wrote that, “Mainstream thought has moved in Lighthizer’s direction. Even economists acknowledge that the shrinking U.S. manufacturing base, partly due to trade, has had collateral costs: “deaths of despair” in communities devastated by lost factory jobs, and dependence on China for products vital to economic and military security.”

Ip added that, “Trump rewrote the consensus on trade policy, so much so that President Biden largely copied it: Prioritize domestic manufacturing, deprioritize trade deals, sideline the World Trade Organization and embrace tariffs.”

He stated the Lighthizer wants to utilized tariffs and capital controls to eliminated the trade deficits.

Wesleyan University Assistant Professor of Economics Balazs Zelity stated in an e-mail interview with Patch.com that, “With stringent enough policies, it should theoretically be possible to eliminate trade deficits. The question is whether the US is willing to pursue the steps required to do this.”

“There might be reluctance for at least two reasons. First, closing trade deficits would likely significantly increase the prices of consumer goods feeding into inflation. Second, labor shortages would likely be exacerbated which would fuel wage inflation,” Zelity wrote.

He added, “In light of this, the Fed would have to keep interest rates high. All this could potentially lead to a stagflation situation with meager growth and high inflation co-existing at the same time. Are Americans willing to tolerate this in exchange for running a trade surplus? The answer to that question is what tells us whether it is realistic to eliminate trade deficits.”

On a related topic, the Federal Reserve Board appears to be in a holding pattern. It had tentatively pledged to lower interest rates, which have been the highest in 40 years. However, Christopher Rugaber of the Associated Press has reported that since “Inflation has remained stubbornly high in recent months,” the Fed now has “said it doesn’t plan to cut interest rates until it has ‘greater confidence’ that price increases are slowing sustainably to its 2% target.”

Remarked Zelity, “The Fed’s goal is to bring inflation down to 2% while also keeping an eye on employment. The decline in inflation towards the 2% goal was paused in late 2023 and early 2024. This suggests that there is no good reason to lower interest rates yet, especially as the labor market seemingly remains strong.”

Reports indicate that one factor in the continued higher inflation is the cost of housing.

U.S. Rep. Jim Himes (D-4) of Greenwich recently told Patch.com that there is a lack of supply and America needs an additional five to eight million units.

Zelity stated that he agrees.

“The main issue seems to be the low supply of housing on the market,” he wrote. “People who have locked in low interest rate mortgages prior to the current high-rate environment are reluctant to sell. As a result, supply is low. Some markets, where new construction has been particularly high, have actually seen an increase in supply and a corresponding drop in prices. But this does not appear to be a widespread phenomenon as of yet.”

The federal debt exceeds $34 trillion.

Himes voted for a version of the Alan Simpson-Erskine Bowles Commission deficit reduction plan 14 years ago. There were only 38 supporters in the U.S. House. He said the debt needs to be tackled. He said the best first step would be the establishment of another commission, since it would more likely make viable recommendations instead of seeking to preserve pet projects.

Stated Zelity, “It is certainly important to bring the federal government’s debt trajectory to a long-run sustainable path. I do not know what is the best way, politically speaking, of achieving this. But it is certain that population aging is going to put even more pressure on the government budget in the coming decades, which will have to be addressed somehow.”

During his tenure in the White House, Republican former President Donald Trump discussed the advantages of a weaker dollar.

Zelity wrote, “A weaker dollar would likely improve the trade balance by making American exports more competitive and imports more expensive. This could potentially be beneficial for GDP growth in the shorter run.”

He added, “But the source of the dollar’s strength is the centrality of the US in the global financial system, which means foreigners hold a lot of financial assets in US dollars including US government bonds. As a result of this, the US has unparalleled geopolitical influence as well as the ability to borrow cheaply. The price to pay for this is a strong dollar. So, while in the short run a weaker dollar may improve growth, in the longer run it is hard to imagine how the dollar could be significantly weaker without the US giving up its dominant role in the global economy.”

Resources:

E-mail interview with Balazs Zelity, Patch.com, on Wednesday, May 22, 2024.

https://apnews.com/article/fed...

https://www.wsj.com/economy/housing/fed-inflation-rate-housing-rentals-2f28c5ba

https://patch.com/connecticut/brookfield/himes-running-ninth-term

https://www.wsj.com/economy/trade/he-helped-trump-remake-global-trade-his-work-isnt-done-78547fff

https://www.amazon.com/Paper-Soldiers-Weaponization-Dollar-Changed/dp/0593539117

https://www.wsj.com/economy/ce...