Donald J. Trump has made his campaign mostly on incendiary rhetoric and populist phrases rather than concrete policy suggestions. Countless news cycles have been overflown with the latest Trump feud on Twitter with good ol’ so and so or whomever it was that day.
One area Mr. Trump seems to have proposed at least some coherent scheme is trade. When talking about China especially Trump has made one point clear, that China is a currency manipulator who is taking away American jobs and President Obama and secretary Clinton were the root cause of this problem. The only way to fight China on their currency manipulation (according to Mr. Trump) is to categorize them as a currency manipulator and, as stated in a recent NYTimes interview to hike tariffs (taxes on imported goods) on Chinese imports by roughly 45%. That tariff and the treasury departments designation of China as a currency manipulator would, according to Mr. Trump’s website, bring China to the negotiating table.
Three things here that according to Mr. Trump would solve all of our trade deficits and allow manufacturing to come back to America where it belongs. The only problem is, things would get much worse before they got better, if they ever would get better.
To start, the labeling of China as a currency manipulator doesn’t look at the entire picture, nor arguably the problem.
The Chinese currency or the yuan has not been pegged with the U.S. dollar since 2005 when the Chinese central bank started to allow the yuan or the renminbi to float more freely with the dollar. Since then the yuan has appreciated or gone up in value by about 35% over the last decade. Therefore, using Mr. Trump argument, since the renminbi has appreciated by about one third over the last ten years, trade deficits should have declined between the United States and China. The reality, however, seems to suggest otherwise.Also, as of May of last year, the IMF has stated that the renminbi is no longer undervalued.
According to statistics from the United States Census Bureau which records the trade deficits with all trading partners the United States has, the trade deficit with China has steadily increased over the last ten years, even though China’s currency has gone up in value by 35%. This begs the question, what is the real issue that causes these trade deficits that Mr.Trump seems to not understand?
The answer is unfortunately quite complicated. The short answer is that the overall trends of the United States Economy have changed. The average American does not save as much as they used to. We have become an economy based on consumption. A macroeconomic viewpoint is that the amount of domestic savings in the U.S. is less then the amount of investment throughout the U.S. That deficit between the national savings and national investment then leads to a large influx in foreign capital which then leads to higher trade deficits.
This is a modest attempt at an intricate macroeconomic concept, but the basics highlight the fact that Mr. Trump, who has made his campaign on being a savvy businessman, doesn’t recognize the fact that his basic argument for trade is not the real issue that is causing these deficits, and the trade war he is suggesting getting involved in will only make things much, much worse for the American consumer.