Can Trump’s sound economic policies outweigh his damaging view of trade?
Koichi Hamada argues that the Trump administration’s missteps – especially in Charlottesville – along with his misconceptions on trade imbalances, threaten to stifle his good ideas on deregulation and infrastructure
President Donald Trump’s unpredictable approach to policymaking has fuelled widespread concern about where the United States is headed. Yet America’s stock market has performed well since Trump’s election, faltering only when his administration’s political future appears in doubt. That is no accident: on the economic front, Trump’s approach might have some redeeming qualities.
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From the outset, the Trump administration has maintained a pro-business attitude, exemplified by his commitment to deregulation, raising hopes among investors of a boost to the US and global economies. To be sure, efforts to roll back, say, environmental protections will ultimately do serious harm to the US, even if they allow some companies to improve their bottom line in the short term. But the Trump administration’s eagerness to free financial markets of excessive regulation may ultimately prove beneficial for all.
When regulations become too cumbersome, they can do more harm than good. The Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law by president Barack Obama in 2010, is a good example. The Dodd-Frank legislation contains rules that have impeded the functioning of the international monetary market: by raising US dollar funding costs for foreign banks, the rule compromised so-called covered interest parity.
For Japan, this undermined the transmission of monetary easing in international financial markets – a mechanism that was already strained by risk-averse investors flocking to the Japanese yen as a safe-haven currency. With Trump removing friction-causing regulations and inspiring stock-market confidence, the Bank of Japan may finally be able to limit the yen’s appreciation, thereby spurring inflation, employment and the stock market.
Another reason for optimism about the US and world economies is rooted in the Trump administration’s US$1 trillion plan to rebuild America’s infrastructure. Unfortunately, Trump’s equivocation about the white supremacist violence in Charlottesville, Virginia, earlier this month destroyed the last traces of good will he may have had in the US Congress. With two business advisory councils having been disbanded in the wake of the Charlottesville incident, following an exodus of CEOs critical of Trump’s response, plans for an infrastructure advisory council have now also been dropped.
German Chancellor Angela Merkel poses for the media as she arrives for her annual press conference in Berlin on Tuesday. The Trump administration has targeted Germany, along with China, for its trade surpluses with the US. Photo: AP
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But political disarray is far from the only potential threat to Trump’s economic success. His administration’s trade policy is based on serious misconceptions. Trump and his advisers seem to believe that only balanced bilateral trade is fair and, therefore, desirable. In fact, such balance is very difficult to achieve in an open trading system, and pursuing it would actually be damaging, as it would undermine the overall benefits gained through trade.
