BUDGET/TRADE DEALS/TRUMP AS PRESIDENT: “Reducing the deficit in external payments is a key objective of the Trump administration. The shortfall means that U.S. residents are consuming more products and services produced abroad than foreign consumers do in the U.S. If this could be reversed, Donald Trump’s advisers reason, it would mean that more of the globally consumed items would have been made in the U.S. with American labor.
Since the Trump election victory was predicated on improving the lot of domestic workers, this has a lot of political appeal. But his proposals mean there would be no winners in financial markets. Is there a way the Trump administration can achieve its campaign promise and have a positive impact on equity and bond markets at the same time? A history of U.S. trade negotiations over the past two decades, and a closer examination of the U.S. external payments deficit, suggest that there is such a path.
Peter Navarro, Director of the White House National Trade Council, uses the Keynesian income/expenditure identity to justify restrictions on trade. Gross domestic product is the sum of consumption, investment, government spending and net exports. It is that final item that authorities are focused on. By limiting imports through new tariffs, net exports would rise, and GDP would be higher as well. In addition to positive implications for employment, reduced competition from imports would mean higher revenues for U.S. companies, pushing up equity valuations. (Commerce Secretary Wilbur Ross said Trump will order a comprehensive study to identify every form of ‘trade abuse’ that contributes to U.S. deficits with foreign countries.)”
-Komal Sri-Kumar, “The Trump Trade Policies That Can Benefit Financial Markets,” Bloomberg, March 31, 2017 8:25am