global effects of the Trump stimulus

In its latest World Economic Outlook, the International Monetary Fund (IMF) predicts global growth of 3.9% this year and next – the best performance since 2011. Its prediction is based largely an expectation of stimulus from Donald Trump’s tax cuts, which will bring an inevitable increase in US imports and the country’s current account deficit.

But what response might we expect from a president who dislikes trade deficits? The answer is predictable, as FT columnist Robin Harding explains.

We already know Mr Trump’s answer to a trade deficit: he has put tariffs on steel, supposedly to protect US national security; proposed a large package of tariffs on China; and he is putting pressure on US allies from Canada and Mexico to South Korea and Japan to renegotiate trade deals. When US deficits with these countries widen, he is likely to respond with more of the same.

The trouble with his strategy is trade barriers have almost no effect on trade deficits. Rather, they reduce the overall volume of trade and shift it about. As Joseph Gagnon of the Peterson Institute points out, countries with low trade barriers such as Switzerland and Singapore have some of the biggest trade surpluses, while heavily protected Brazil and India have run deficits. What actually decides a current account deficit is the difference between a country’s savings and investment. With his stimulus, Mr Trump is making a determined effort to widen that gap in the US.

Robin Harding, “The world readies itself for the Donald Trump boom“, Financial Times, 21 April 2018 (gated paywall).


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