The Obama Administration increasingly sees the trade imbalance as a core barrier to global economic stability, it seems. I never, ever would have written that sentence before today. However, this just appeared online:
The Obama administration on Friday urged the world’s biggest economies to set a numerical limit on their trade imbalances, in a major new effort to broker an international consensus on how to handle festering exchange-rate tensions.
Officials from Britain, Canada and Australia quickly expressed support for the idea, but Germany expressed resistance and Japan seemed ambivalent. China, whose currency battle with the United States has threatened to derail the process of global economic cooperation, had not formally weighed in. …
Treasury Secretary Timothy F. Geithner offered the administration’s proposal at a two-day meeting of G-20 finance ministers and central bankers in Gyeongju, South Korea. Mr. Geithner called for the biggest industrialized economies to keep their current-account balance — whether a surplus or a deficit — below 4 percent of gross domestic product.
The stimulus did not bring us back to growth, so fiscal policy can’t do much. The Fed’s toolbox is basically empty, so monetary policy won’t help. Trade policy has to be next (though it should have been first).
But 4%? Not good. Our deficit is about 3% of GDP now (see this Morici article on TradeReform). That means we could have trade deficit 1/3rd larger before it is a problem? It is a problem now. We would be crushed if the deficit got that big.
Germany, which practices state-managed capitalism so as to be a major exporter, had this laughable response:
The German economy minister, Rainer Brüderle, told reporters that the proposal could be viewed as a reversion to “planned economy thinking.”
Um. They do planned economy thinking now. Germany’s version of state managed capitalism makes them successful. They talk free trade but do something entirely different.
I’m a fan of unilateral action. However, I concede that multi-lateral action is relevant and probably the end game in many circumstances. Diplomacy has failed because it has no teeth.
You cannot achieve a multi-lateral result without unilaterally stopping the trade cheating. You have to stop the erosion now, for your own economy’s (and your own political future’s) sake. You have to show that you are serious. You have to eliminate the benefit of continuing the cheating. Then the others see the benefit of coming to multi-lateral agreement on more favorable terms.
This “hard limit” or “benchmark” is very new thinking at the federal level, though old thinking elsewhere.
Ralph Gomory says that you have to simply mandate balanced trade because there are so many ways to cheat that you can’t stop them all. His proposal is the Warren Buffet plan which was sponsored by Byron Dorgan. That bill would grant credits for exports and allow imports only to the extent those export credits were created. There would be no tariff, subsidy, currency, domestic procurement, etc. issue. Just a limit.
The good news is that Geithner’s plan is a shift from the “free trade is win-win no matter the imbalances” thinking of past administrations.
The bad news is that a 4% trade deficit is a jobs and growth disaster.