Donald Trump didn't calm trade jitters at Davos. And his obsession with trade deficits everywhere dilutes focus from the real problem: China.
Robert Robb: Donald Trump didn't calm trade jitters at Davos. And his obsession with trade deficits everywhere dilutes focus from the real problem: China.
President Donald Trump undoubtedly thought that his Davos speech was a big success.
And in one respect, it was. Trump was there to pitch the United States as a good place in which to invest. And due to his deregulation and tax reforms, there is a bounce in the American economy.
In another respect, however, it wasn't. Trump also sought to reassure his international audience about his intentions on trade. But nothing he said will, or should, calm the jitters.
Trump says that he wants "fair and reciprocal" trade. Some profess not to understand what Trump means by that. But Trump has made it clear.
Trump regards the balance of trade as a scorecard. If a country has a positive balance of trade, it is winning. If a country has a negative balance of trade, it is losing.
The United States has a large trade deficit, and Trump hates losing. "Fair and reciprocal," to Trump, means trade that sharply reduces or eliminates America's trade deficit.
What is unclear is how that possibly could be achieved.
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The United States is a relatively rich country and the world's largest consumer market. Americans like to buy a lot of stuff and we prefer at a bargain price. We have apps to help us save cents on the dollar.
If there were perfectly free trade – all countries had market economies with no tariffs or subsidies – the United States would undoubtedly run a trade deficit. And probably a large one.
The only way to preclude a large U.S. trade deficit would be through managed trade, where countries agree, formerly or informally, on how much of each other's goods they will buy.
That appears to be where Trump is headed. It explains his preference for bilateral rather than multilateral trade agreements, even though the latter are clearly better if the goal is free trade.
The Trump administration is gearing up on protectionist measures within its discretion. These are best seen as attempts to gain leverage points for negotiations on managed trade.
The rest of the world, however, has no interest in negotiating managed trade with the United States. A world in which the U.S. dictates the terms of trade to its advantage does not exist.
Other countries do want access to America's consumer market. So, they will attempt to finesse the Trump trade agenda. But, in the end, there will not be managed trade deals that substantially reduce the U.S. trade deficit.
Meanwhile, the Trump obsession with trade deficits everywhere dilutes focus from the trade problem that should concern the United States and other free-market democracies.
The problem with trade isn't Mexico, Canada, Germany, Japan or South Korea, with whom the United States runs trade deficits, at least in goods. All countries, including the United States, try to give home companies some advantages. But these are all market economies, light on subsidies and tariffs.
The problem with trade is China, which is also responsible for about half of the total U.S. trade deficit.
China professes to still be a communist country, but its economic model is closer to fascism. Businesses in China are ostensibly privately operated. But they are subservient to, and are to serve the interest of, the state.
The state, in turn, is controlled by the Communist Party. And China strongman Xi Jinping is tightening the party's grip on all institutions in the country, including businesses.
Businesses in China are required to have a party committee as part of them. Xi is increasing the influence of the party committees on business decisions, such as where to invest and who to hire. Pressure is even being placed on foreign-owned companies to expand the involvement of party committees in their Chinese operations.
Despite some posturing by Xi at last year's Davos confab, China has no intention of pursuing free trade. Its publicly stated economic goal is to obtain self-sufficiency and position itself as a leading world exporter in ten strategic industries, ranging from information technology to robotics and clean energy.
There are other countries pursuing forms of state capitalism, but none have the heft to distort global markets that China possesses.
The United States has lacked strategic clarity about China since the end of World War II. But for the Trump administration, if trade is the subject, China should be the issue. Everything else is a futile distraction.