Trumponomics: The Global Implications

On January 21st, when President Donald J. Trump took the oath of office to serve as the President of the United States of America, he instantaneously acquired unparalleled capacity to shape the global economy. The President of the United States wields such tremendous power in terms of global economics that he could either single-handedly commence a debilitating, world-wide recession or choose to foster an era of economic globalization and widespread prosperity. Among other things, Trump’s economic agenda has been highly scrutinized by his political counterparts, renowned financiers, and economists alike. The global bandwidth of the President’s fiscal policy primarily rests on its ability to enact change through shifts in American trade diplomacy.

First and foremost, President Trump hopes to reduce America’s trade deficit through a mixture of protectionism and mercantilism. In his recently published op-ed in The Wall Street Journal, Peter Navarro, the director of the White House’s National Trade Council, outlined the Trump Administration’s intentions to expand US exports, reduce imports, and, all the while, reduce America’s merchandise trade deficit — a reduction that the Trump administration thinks will increase the United States’ wealth and economic growth. In the execution of this plan, Trump claims that he will leave the ashes of instrumental trade agreements like NAFTA (The North American Free Trade Agreement) and the Trans-Pacific Partnership in his wake. While the idea of decreasing the trade deficit and increasing exports seems appealing on paper, most economists disagree with the premise of the idea. For instance, Peter Navarro and President Trump view an increasing trade deficit as a negative occurrence, but Richard Epstein, a member of the Hoover Institution, views the idea behind a trade deficit as potentially positive. Since the balance of payments must always add up to zero, the automatic ballast for a trade deficit comes in the form of foreign direct investment. Epstein believes that a trade deficit epitomizes the notion that one country has convinced firms and investors from other countries to invest in it (capital is flowing in), where their financial support (foreign direct investment) can be used to spur economic development in the form of jobs, technological innovation, and other ways. In the case of American automakers, outsourcing the manufacturing of automobile parts to other countries, where labor is cheaper, is not a bad thing, as it allows automakers to increase output, increase margins, and more efficiently sell their cars in domestic markets. Engaging in trade diplomacy (predominantly with the use of tariffs) and thus making it harder for US companies to manufacture in countries with lower production costs can be potentially debilitating for these firms because it reduces their ability to remain competitive in an increasingly globalized trade spectrum.

One of the principal parts of Navarro’s argument lies in the equation that determines a country’s GDP (gross domestic product). For reference, GDP represents a country’s total economic output (goods and services produced) in a calendar year. The equation of the GDP is C (consumption), plus I (investment), plus G (Government Spending), plus nX (exports minus imports). Navarro believes that increasing the US’s nX value will result in an increasing GDP and a healthier economy. However, what the Trump Administration does not realize is that the trade deficit itself is a very small part of the United States’ GDP in the first place. According to the Bureau of Economic Analysis, in 2016 the trade deficit stood at about $500 billion while private investment and consumption — two other parts of the U.S. GDP — stood at $3 trillion and $12.8 trillion, respectively. If we look at the disparity between the relative sizes of the trade deficit and other GDP components, we understand that using policy to augment other GDP components rather than nX would have a far larger effect of the U.S. economy. Even if Navarro is correct in his assumption that a trade deficit is an indication of a weak economy and, therefore, needs to be corrected, history stands defiantly in his path. During the Great Depression, the United States was exporting an exponentially larger amount of goods than it was importing. Conversely, during the Clinton administration, the US economy was booming, with full employment and roaring economic growth, but simultaneously featured a skyrocketing trade deficit.

Imposing tariffs and destroying trade agreements will severely strain the health of the global economy because it will not only hurt American firms by causing them to be inefficient but it will also harm foreign-based manufacturers who rely on U.S. trade to survive. Global trade is a quintessential manifestation of a symbiotic relationship, a relationship where both parties involved benefit from the transaction. Canada, Germany, Japan, Mexico, and China have already notified the Trump administration that President Trump’s economic policies are concerning. Destroying agreements like NAFTA and imposing harsh tariffs on imported goods will categorically ravage the global economy, leaving the US economy at the center of the shambles — a possibility that I certainly hope does not become a reality.