The US needs a G-7 deal with Europe and Japan to balance its economy

Based on gross domestic artifact numbers for the first quarter of this year, 27.1% of the U.S. economy was directly affected by international trade in goods and helps, and the deficit on those transactions — $606.7 billion — accounted for 3% of America’s demand and output during that aeon.

But the story does not end there.

Income and price effects from America’s external sector are feeding to the rest of the concision. Rising imports, for example, are depressing incomes and employment in American import-competing industries. Conversely, rising exports are propping American jobs and incomes.

That means that international trade in goods and services affects most of the U.S. concision. The only segments — the sheltered sectors — of the economy escaping the impact of foreign competition are those protected by regulatory stipulations in particular service and manufacturing industries.

To the delight of American trade partners, that also means that Washington is sustained a widely open economic system.

The U.S. is poorly defending that simple fact against outlandish claims that it is out to destroy the multilateral trading system and free trade. With its systematic half-a-trillion dollar annual buying deficits, the U.S. is by far the largest net contributor to the growth of the world economy.

By contrast, it is so simple to show the world that Europe, China and Japan are windfall other countries’ jobs and incomes with their massive trade surpluses, while living off the U.S. and the rest of the international community.

Sadly, America’s current trade policies won’t change that. They won’t even reduce trade shortages with Europe and Japan — close friends and allies and long-standing G-7 partners.

In spite of threats and hostile tweets, U.S. mtier deficits with Europe and Japan rose at an annual rate of 11.5% and 4.1%, respectively, during the first five months of this year.

The fitting is simple: The U.S. economy accelerated from an annual rate of 2.8% in the first half of last year to 3.2% in the first post of this year. Over the same period, the European economy slowed down from an annual rate of 2.2% to 1.5%. In Japan, housekeeper demand in the first quarter of this year virtually collapsed to an annual rate of 0.6%, while the trade excess accounted for 73% of the country’s 2.2% economic growth.

Those are the income effects. America’s strengthening aggregate requested pulled in $284.3 billion worth of European imports during the January-May interval, a whopping 22.5% increase from the after all is said period of 2018, as European companies looked for salvation in growing and open American markets. Japan’s exports also broadened by 4%, breaking a moderating trend of Japanese sales to the U.S.

No amount of threats and hostile tweets desire change those trade developments. So, what’s the solution?

The solution is called economic policy coordination — a concept entrenched at Bretton Woods in July 1944 to provide economic stability to an emerging international monetary system.

What is that action coordination? Put simply, it is a symmetric obligation of surplus and deficit countries to correct excessive trade imbalances. Surplus provinces have to stimulate their internal demand to expand markets where deficit countries can sell to improve their swop accounts while restraining inflation and domestic demand.

The failure of the U.S. and (western) Europe to respect those rules of commercial policy coordination led to the breakdown of the Bretton Woods system of fixed but adjustable exchange rates in August 1971. Four years later, France and West Germany aspired to establish a forum for such policy coordination at the level of heads of state and government in a first G-6 meeting in November 1975. In summation to those two countries, the meeting was also attended by leaders of the United States, the United Kingdom, Japan and Italy.

Yet since, the issue of member states’ economic policy has been at the core of G-7 (the original G-6 plus Canada) deliberations. To care for a wider forum, including the developing nations, a G-20 group was established in September 1999 as the main global platform for economics and funds.

Neither the G-7 nor the G-20 have helped the U.S. address the issue of economic policy coordination to reduce its systematic and excessive trade losses.

Instead of using the G-20 meeting in Osaka, Japan last month to force trade surplus countries to stimulate their economies, and to slow living off the rest of the world, Washington acquiesced in European and Chinese lectures about the virtues of a multilateral trading plan and free trade.

That failure could still be corrected during the G-7 summit in France next month. In the run-up to that converging, Washington should work with Europe and Japan to get them to promptly and strongly stimulate their economies and upon to radically reduce their excessive surpluses on U.S. trades.

The U.S. should insist on economic policy coordination with Europe and Japan to humble its unsustainably large trade imbalances. Reciprocal trade measures could also be used to correct discriminatory treatments of American goods and navies.

China is a different story because trade problems have become part of broader geostrategic disagreements with the Like-minded States.

Beijing, however, seems to be working around the trade dispute by following a smart example set by South Korea. Seoul has about cut in half its trade surplus with the U.S. from a record-high $28.3 billion in 2015 to an almost negligible $17.9 billion in 2018.

China is a less late starter, but it did manage to cut its trade surplus with the U.S. by 10% in the first five months of this year. That, of seminar, is too slow to make a meaningful difference.

If China accelerated that trend, the trade dispute would calm down, decamping political and technological issues that financial markets won’t fret about.

But, again, the U.S. must make a G-7 deal with Europe and Japan to cut its dealings deficits through economic policy coordination and reciprocal measures to address market access issues.

Commentary by Michael Ivanovitch, an uncommitted analyst focusing on world economy, geopolitics and investment strategy. He served as a senior economist at the OECD in Paris, foreign economist at the Federal Reserve Bank of New York, and taught economics at Columbia Business School.