Trump does not like multi-lateral trade agreements because countries as a group can exercise muscle during negotiations while in bilateral trade agreements the US has the advantage of economic size to extract disadvantageous concessions from the weaker nation. Case in point is The Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP). The TPP that was agreed with 11 negotiating partners, including Canada and Mexico. Trump dumped TPP and has shown no interest in the TTIP.
Trump has said that “Tariffs are the Greatest! “may want to be more ambitious by dumping all barriers to trade than the deals or negotiations he inherited and likes to get rid of protectionism in a number of areas, including anti-dumping, countervailing duties, and Jones Act restrictions on shipping to and from American ports, along with agriculture subsidies.
These action would be a remarkable about-face for his current administration policies on trade but it would require an agreement from Congress and these remaining areas of U.S. trade protection have survived years of liberalization attempts and have deep-rooted support from members of Congress.
However, removing these barriers in bilateral negotiations have other issues, if the United States were to drop tariffs on X items for a given country, WTO rules would require the United States do so as well against all other countries. This is one reason why other Presidents have favored multilateral negotiations.
There is an additional set of problems than just dropping subsidies and barriers because they include regulatory issues such as tech companies engaged in anti-competitive behavior. Tech companies and the agricultural sector might want to use the opportunity of a trade deal to lean their weight as leverage due to their bigger size. Nonetheless, these changes would not address the obsession Trump has with trade deficit, since that reflects the difference between savings and investment, not trade policy.
Tackling trade deficits would require heavy government intervention in the economy where the United States would need to stop borrowing from the rest of the world especially, Asia as U.S. borrowing is the mirror image of a trade deficit. This would likely require substantially higher interest rates in the United States, in order to entice the public into higher savings rate.
We are witnessing a recent experience with China, that “one tweet can halt communication between the two parties, and rapidly escalate into the imposition of tariffs" that can lead to a full blown trade war.
While global trade war risks have dominated the agenda of late another red flag is the ongoing flattening of the US yield curve. In addition, financial markets have to contend with dollar reserves being exchange for euros and other currencies as Asian countries strip their dollar reserves to a historical low of 62%.
Current economic condition is forcing central bank policy normalization and higher short-term rates; while longer-term pessimism over the global economy is prompting a financial flight to safety. Trump is terrified of the Feds increase in interest rates because that would put a hole on his bluffing balloon regarding trade and his bloated tax cuts which is adding to a mounting deficit of debt to GDP ratio of 108% in 2018.
Press reports indicate that China’s holdings of US sovereign debt dropped to $1.165 trillion in August, from $1.171 trillion in July. Tokyo cut its holdings of US securities to $1.029 trillion in August, the lowest since October 2011.
Discharging US Treasuries, one of the world's most active reserve financial papers, has recently become a trend among major holders. Russia dumped 84 % of its holdings this year as relations between Moscow and Washington are at their lowest point in decades despite Trump’s election which was favored by the Russians.
Goldman Sachs reports that Turkey and India have followed suit. Like Russia, Turkey has dropped out of the top-30 list of holders of American debt following a conflict with Washington over the attempted military coup in the country two years ago. While India remains among the top-30, the country has cut its US Treasury holdings for the fifth consecutive month, from $157 billion in March to $140 billion in August. Russia, China and Iran, dragged down the dollar’s share of global central-bank reserves and these data is confirmed by the International Monetary Fund.
If Trump economic dominoes start to fall the US economy will suffer unknown consequences as this is entirely new territory the current administration is trekking on.
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