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EDITOR IN CHIEF- ABDULLAH BIN SALIM AL SHUEILI

Time to choose between economy and trade war

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John Kemp -


The White House is becoming increasingly volatile and erratic in its pronouncements about the economy and trade as the internal contradictions between its policies become obvious.


President Donald Trump and his advisers have blamed the Federal Reserve and a range of foreign governments including China and Germany for the evident slowdown in the economy, especially manufacturing, saying that: US interest rates are too high. The dollar is too strong. Foreign governments are manipulating their currencies to obtain an unfair competitive advantage. Past trade deals were one-sided. In all, China, Germany, Japan, South Korea and a host of other countries have been blamed for trade and financial policies that harm the United States, according to the administration.


But more than two years into a bold effort to remake US international policy by using tariffs to increase leverage in trade negotiations, the trade deficit is still growing at an annual rate of 15 per cent.


There is no evidence the US currency is significantly overvalued or that currency misalignment is contributing to the deficit.


The dollar exchange rate against a trade-weighted basket of other currencies is close to its long-run average, once adjusted for differential inflation rates.


Instead, the deficit stems from the fact that the United States spends more on investment in new buildings, equipment and software than it saves out of national income, borrowing the difference from foreigners.


The deficit is increasing rapidly because the US economy is growing faster than the economies of its major trading partners. As a result of differential growth rates, domestic demand for imports is growing more quickly than demand for US exports in overseas markets.


The administration’s tariff and sanctions policies have made the deficit worse by contributing to a sharp slowdown in growth in China and the rest of Asia and Europe, which is slowing demand for US exports. US exports of goods and services fell 1.5 per cent in the three months between April and June compared with the same period a year earlier, the fastest decline for almost three years.


The last time US exports declined was during the mid-cycle slowdown of 2015/16 and before that the recession of 2008/09.


The export slowdown is rebounding on the United States, contributing to a slowdown in the domestic economy, especially the more trade-exposed manufacturing sector, and in turn curbing import growth. The continent-sized US economy is much less open to international trade than most other major economies in terms of the share of imports and exports in gross domestic product.


But the influence of trade on domestic growth is evident in the nearly synchronised acceleration. — Reuters


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