Saturday, June 9, 2018

9/6/18: Misinformed and wrong: President Trump's trade policy stance on the EU


I just posted on @twitter a short thread concerning the U.S.-EU trade and payments balances from 2003 through 2017 and a trend-based forecast for same out to 2021. The thread can be accessed here: https://twitter.com/GTCost/status/1005467563034152961.

The key problem is that in his trade policy strategy, President Trump appears to be oblivious to several key factors that materially determine the true extent of imbalances the U.S. trade with the EU, including:

  1. Trade in services: while the U.S. is running a large (USD 153 billion dollars in 2017) deficit in goods trade with respect to the EU (and this deficit is persistent since 2003), the U.S. is running USD 51.3 billion surplus in services against the EU, and this surplus is rising (with some volatility).
  2. When trade balance is augmented by transfer payments (accounting for profits of the U.S. companies earned in the EU, less profits of the EU companies earned in the U.S., plus net transfers from the US to EU residents, including pensions payments, etc), the U.S. was running a surplus of USD14.22 billion in 2017 with respect to the EU. In fact, the current account balance for the U.S. with respect to the EU has been in surplus (in favour of the U.S.) since 2009, with 2008 figure being statistically zero (balance).
  3. U.S. net lending (+) or borrowing (-) from current- & capital-accounts vis-a-vis the EU has been in surplus every year since 2008.
  4. In fact, the 'New Economy' (services, IP etc) have generated a huge surplus for the U.S. when trade and income flows with the EU are accounted for.
  5. U.S. true exports to the EU are obscured by the U.S. multinationals accounting strategies that aim to minimise their tax exposures to the U.S. by engaging in extensive transfer pricing, shifting of tax base and complex offshoring of retained earnings. Were these factors taken into the account, the U.S.
  6. Over 2009-2017 period, cumulative balance on trade in goods and services, plus primary and secondary income with the EU, stood at USD 57.3 billion in favour of the U.S. and cumulative net balance on capital and current account transactions basis was USD 112.7 billion in favour of the U.S.


Prior to the G7 Summit President Trump complained in a tweet that the U.S. was running a deficit of USD 151 billion with the EU. The official figure from the U.S. Department of Commerce, however, is USD 153 billion but this figure only covers trade in goods.

The dynamics of full net cumulated 2003-207 balance in payments and trade for U.S.-EU trade, including forecast out to 2021 (pure trend forecast, not accounting for other factors that favour the U.S.) is presented below:

In simple terms, President Trump's trade war on the EU is unwarranted, dangerous, damaging to both economies and a major negative for the U.S. standing in the global economy. It is also reflective of his deeply economically illiterate understanding of the complexities of national accounts.

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