The US can solve its trade problems while relaunching the world economy

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Usually, the trade surplus countries — which are producing more than they are consuming and exporting their excess production — are prime candidates for expansionary demand management policies. They also tend to run relatively sound budget accounts and low inflation. Conversely, trade deficit countries are forced to restrict their domestic demand for reasons of rising inflation and budget deficits.

For a balanced world economy, trade adjustments symmetrically apply to surplus and deficit countries. In practice, however, surplus countries have ignored those rules because they are under no market pressure to adjust their external accounts. The burden of adjustment is, therefore, entirely borne by deficit countries because they have to attract, if they can, foreign savings to fund their deficits. In most cases, they have to submit to stringent adjustment policies as part of conditional lending by the International Monetary Fund.

Third, on the basis of trade adjustment rules one can show, as an example, that the euro area, whose trade interests are represented by the European Union, is a prime candidate for expansionary demand management policies. The monetary union is currently running a trade surplus of more than $600 billion, it has nearly balanced public sector accounts and shows a headline inflation of 1.4 percent in January. At the same time, the euro area is struggling with a 7.9 percent jobless rate, 16.6 percent of its youth is unemployed, and a total of 12.9 million of its people are out of work.

A similar analysis for major Asian trade surplus economies like China, Japan and South Korea — accounting for one-fourth of the world output — would also show that their stronger domestic demand and greater openness to international flows of trade and finance could make a substantial contribution to a faster growing global economy.

Fourth, Washington should be aware that the European and Asian trade surplus countries are expecting to continue dumping their excess output on U.S. markets. Those are decade-old habits deeply ingrained into their economic policies. The White House has to clearly signal that those times are over. America’s trade accounts have to be balanced, the growth of its debts and deficits must be stopped and reversed — and the U.S. now expects that its main trade partners will do their share of supporting global economic growth.

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