OPINION:
The Trump administration has issued its “America First Trade Policy,” the most damaging trade policy since the Smoot-Hawley Tariff Act of the Roosevelt administration during the Great Depression. The rationale for this trade policy is that China and other countries are pursuing protectionist trade policies and industrial policies that negatively impact U.S. industries.
The “America First Trade Policy” has a fatal flaw. In the balance of payments, the flow of goods in trade is linked to financial flows. If Chinese and other foreigners want to invest in U.S. securities, they must generate dollars from goods exported to the U.S. and other countries.
The U.S. government finances deficits in the budget in part by borrowing from foreign nations. Financing the massive budget deficits in recent years has proved to be problematic. Deficits and government debt have been increasing at unsustainable rates for decades.
The higher risk in investing in U.S. government securities is reflected in higher interest rates. During the “Great Moderation” of the 1990s, the U.S. had one of the lowest interest rates on public debt of any developed country. Today, the U.S. is tied with Britain for the highest interest rates on public debt among developed countries. Interest cost on U.S. government debt now exceeds defense spending and is projected to eat up even larger budget shares in coming years.
If the U.S. government eliminates budget deficits and stabilizes government debt, we should expect the risk and interest rates on that debt to again fall below those of other developed countries. Lower interest rates give China and other countries less incentive to buy U.S. government debt. The counterpart to less incentive to invest in U.S. government securities is less incentive to generate trade surpluses with the U.S. to generate those dollars.
By eliminating federal deficits and stabilizing U.S. government debt, more foreign capital would flow to the private capital market in the U.S. Those capital flows would respond to interest rates on private securities, not the distorted rate on government securities. This would result in a more efficient capital allocation and higher economic growth rates. China and other countries would likely continue to invest in U.S. government and private securities at market interest rates, not at the distorted current interest rates on U.S. government securities.
We are at a turning point at which the policies pursued by the two major economies could trigger a depression comparable to that of the 1930s. There is an alternative to the failed economic policies pursued by the U.S. and China.
The precedent for reform was set in Switzerland and other European countries over the past two decades. In the 1980s and early 1990s, Switzerland experienced a sharp recession and unsustainable public debt, threatening long-term economic growth. Swiss citizens enacted a debt brake through an initiative, with support from 85% of the electorate. With new constitutional and statutory fiscal rules, the Swiss balanced their budget and cut debt as a share of gross domestic product roughly in half to about 30%.
With its debt brake in place, Switzerland assumed a leadership role in restoring free international trade and investment. It has eliminated all tariffs on industrial goods and entered into bilateral free trade agreements with many countries. It has stabilized the value of its currency and expanded its use as a reserve currency and medium of exchange.
The Swiss economy is a model of economic stability and growth, with income and wealth per capita levels exceeding those of other developed countries, including the U.S. As the Swiss government has achieved success in these economic reforms, it has gained greater trust from Swiss citizens. This has enabled it to address long-term issues, such as an aging population and climate change. In Switzerland, a growing trust in government has allowed that country to emerge as a leader in the global economy, something that Swiss economists call growing dynamic credence capital.
Perhaps the most difficult challenge for the U.S. government is restoring trust in its economic policies and leadership role in the global economy. Trust in our government is eroding in our strategic partners and adversaries. Overcoming the bitter economic rivalry between the U.S. and China will be difficult. As trust in economic policies deteriorates, the U.S. and China are experiencing declining dynamic credibility capital.
We should not underestimate the importance of trust in our economic policies and relations with other countries. The “America First Trade Policy” could collapse international trade and investment, just as it did during the Great Depression.
• William A. Owens is a retired Navy admiral who served as the third vice chairman of the Joint Chiefs of Staff from 1994 to 1996. Barry W. Poulson is on the board of directors of the Federal Fiscal Sustainability Foundation.
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