Fixing Trade Rules—Or Fixing Trade Deficits?

In international relations, a distinction is often drawn between the “realist” school that bases decision-making on an objective calculation of national interests, and an “idealist” school that emphasizes principles such as promoting democracy and human rights. When President Trump declared in his April 7 Weekly Address that “[O]ur decisions will be guided by our values and our goals—and we will reject the path of inflexible ideology that too often leads to unintended consequences” he was offering something to both sides: “values” for the idealists and “goals” for the realists.

Although the president was speaking about foreign policy, his words—if translated into action—would provide a reliable guide for how the administration could conduct its trade policy. For unlike hard security policy, where values and interests sometimes sit uncomfortably with one another, in twenty-first century trade policy the two can and should go hand in hand. A strategy of promoting an open and high-standard international trading system advances U.S. national interests while at the same time expressing core values like the rule of law and the primacy of private economic actors.

When it comes to trade policy, however, the administration seems to think a dose of the same ideology that the president eschewed for foreign policy still has some usefulness. Exhibit A is the White House’s approach to the current account or trade balance. In an executive order issued in March, the president requested the Commerce Department and the U.S. Trade Representative to report back within 90 days on the causes of bilateral U.S. trade deficits, with a view to wresting changes from trading partners where unfair trading practices can be discerned. The U.S. has its third largest trade deficit with Germany.

This emphasis on ensuring specific results—reducing the trade deficit—rather than on creating a level playing field through new rules, is a first cousin of the mercantilist ideology according to which a country will grow stronger economically the greater a share of global exports it captures. Although this school of thought was discredited by successive British free trade theorists, it has become fashionable in some quarters to reassert its relevance in the face of aggressive trading practices from China.

During the second meeting of the AICGS Geoeconomics Strategy Group on April 5—which posed the question “Trade Policy: Is the Best Defense Still a Good Offense?”—there was a consensus that a healthy degree of separation needs to be maintained between the debate about unfair trade practices and a discussion of deficits. Yes, when China or any other country violates the rules laid down in bilateral or multilateral trade agreements it needs to be held to account. Moreover, new rules are needed in areas like the digital economy or contingent labor that are not adequately addressed currently. The U.S. and the EU could take the lead in this process through a revised and re-branded version of the Transatlantic Trade and Investment Partnership that is now on hold.

But by focusing on the trading practices of single countries with which the U.S runs a bilateral deficit the administration is forgetting that the so-called called “IMF” dictum—It’s Mostly Fiscal—applies to the trade balance. A country will run a global deficit if (like the United States) it invests more than it saves, so the solution is a different set of tax and other domestic economic policies to raise the savings rate. (Likewise, if Germany’s surplus is deemed to be too high it should increase government and private investment.) The United States also maintains a trade deficit because of the high value of the dollar, which makes imports cheaper, and because its consumers have a taste for foreign products (think German cars or Japanese video games). If these conditions hold, trying to reduce the trade deficit one by one with individual countries would be like a game of whack-a-mole: even if it disappeared with country A it would soon re-emerge with country B.

The U.S. and Germany share an interest in an international trading system based upon an agreed set of rules. Home to some of the most innovative and productive global companies, they both benefit when these rules reflect their values like the market economy, openness, and the highest labor, environmental, and consumer standards. Focusing on results—who gets to have a deficit and who a surplus—rather than rules might seem like the “practical” thing to do. In fact, trying to fix outcomes in advance would skew the allocation of resources and reduce economic growth in the long run. Those are the kinds of “unintended consequences” the president mentioned that we all need to keep in mind.

The views expressed are those of the author(s) alone. They do not necessarily reflect the views of the American Institute for Contemporary German Studies.

Peter S. Rashish

Senior Fellow; Director, Geoeconomics Program

Peter S. Rashish, who counts over 25 years of experience counseling corporations, think tanks, foundations, and international organizations on transatlantic trade and economic strategy, is a Senior Fellow and Director of the Geoeconomics Program at AICGS. He also writes The Wider Atlantic blog.

Mr. Rashish serves as a Senior Advisor to Transnational Strategy Group LLC, a Washington-based international business and government affairs consultancy, and to the Brussels-based European Policy Centre. He has served as Vice President for Europe and Eurasia at the U.S. Chamber of Commerce, where he spearheaded the Chamber’s advocacy for an ambitious and comprehensive trade agreement between the United States and the European Union, which was officially launched as the “Transatlantic Trade and Investment Partnership,” and developed new engagements in the continent’s emerging markets.

Previously, Mr. Rashish was a Senior Advisor for Europe at McLarty Associates, and has held positions as Executive Vice President of the European Institute, on the Paris-based staff of the International Energy Agency, and as a consultant to the World Bank, the German Marshall Fund of the United States, the Atlantic Council, the Bertelsmann Foundation, and the United Nations Conference on Trade and Development. Mr. Rashish has testified on the euro zone and U.S.-European economic relations before the House Financial Services Subcommittee on International Monetary Policy and Trade and the House Foreign Affairs Subcommittee on Europe and Eurasia and has advised two U.S. presidential campaigns.

He earned his B.A. from Harvard College and an M.Phil. in international relations from Oxford University. He speaks French, German, Italian, and Spanish.