Diplomatist Magazine Diplomatist July 2018

COVER STORY an increase in the number of complaints under the rules of the WTO, potentially triggering many dispute settlement procedures. Conclusions The recent decisions of President Trump to impose new trade barriers in the form of tariffs and quotas on U.S. imports marks the next step in a series of actions towards the establishment of a protectionist U.S. trade policy. When the United States withdrew from the Trans-Paciﬁ c Partnership (TPP) and de facto from the Transatlantic Trade and Investment Partnership (TTIP), both trade agreements were not yet in force and President Trump’s actions had no immediate impact on existing U.S. trade relations. However, the newly introduced trade barriers will have an actual impact on existing trade flows and they could exert considerable harm to U.S. consumers and the rule-based global trading system. U.S. tariffs on imported consumer goods have a direct effect on the purchasing power of U.S. households. Domestically, the trade restrictions will mean less competition and will, therefore, further raise prices for U.S. consumers. Furthermore, President Trump’s actions are likely to result in increasing pressure from U.S. industries and special interest groups to impose industry-speciﬁ c trade barriers. This will trigger further retaliation from U.S.' trading partners and increase tensions in the global trade system. Another problem with President Trump’s trade policy results from his anachronistic view of trade as trade in ﬁ nal products. Global trade patterns have signiﬁ cantly changed in the last decades as trade has become more and more fragmented, and trade in intermediate goods has increased considerably. Global value chains usually spread over many different countries before the ﬁ nal product is assembled and exported. An ever growing global division of labour implies that trade policy measures like tariffs and quotas have implications that are very difﬁ cult to predict as more and more intermediate goods trade is affected. Certainly, tariffs in a world of highly fragmented trade will be targeted, to a large extent, on imported intermediate products. This, in turn, will increase the chance that the competitiveness of U.S. companies relying on cheap foreign inputs in their production will be hurt. President Trump falsely blames other countries for the U.S. trade deﬁ cit. It is standard economics to view the current account as being equal to the difference between savings and investment. In the U.S., savings of the private sector approximately equal private investment, but in the public sector, savings are much less than investment, which is tantamount to saying that the public sector runs a sizable budget deﬁ cit. Hence, the sum of the balances of the private and the public sector is negative and, thus, the current account is negative. The latter can only improve if the private sector saves more or the public sector runs a lower budget deﬁ cit. This economic relationship is not a particular theory, but it is an identity. The goal, pursued by President Trump, to reduce the U.S. current account deficit by introducing new import tariffs is, therefore, unrealistic as long as the ﬁ nancial balances of the private sector and the public sector do not change. As the current account reﬂ ects ﬁ nancial balances, current account imbalances are always an expression of domestic economic activity. Put differently, if the trade deﬁ cit disappears and U.S. citizens do not suddenly save more, the question is who would then ﬁ nance the U.S. government deﬁ cit. Hence, trade policies like tariffs and quotas are not appropriate means to counteract those imbalances. Protectionism is always a short-term policy, because it ultimately does not help an economy to become more efﬁ cient or productive. When looking at economies as a whole, protectionism typically creates only losers. This is the case because the effects on some parts of an economy that may beneﬁ t from trade restrictions are more than offset by the parts of the economy that suffer, such that the net effect is virtually always negative. This is not likely to be different in the current U.S. situation. Only time will tell if the Trump administration realises the same before things go too far.  President Trump falsely blames other countries for the U.S. trade defi cit. It is standard economics to view the current account as being equal to the difference between savings and investment. 1 Michael Frenkel is Professor of Macroeconomics and International Economics at the WHU – Otto Beisheim School of Management, Vallendar, Germany. 2 Benedikt Walter is research assistant at WHU – Otto Beisheim School of Management, Vallendar, Germany. Extraordinary and Plenipotentiary Diplomatist • Vol 6 • Issue 7 • July 2018, Noida • 31

Diplomatist Magazine Diplomatist July 2018 | Page 31