Daben Baden - The European Central Bank (ECB) might have some advice for US President Donald Trump as he tries to reduce his nation’s current-account deficit: trade more.
Countries trying to improve their balance should facilitate greater participation in global value chains, according to an article to be published in the ECB’s economic bulletin. Substituting domestically produced intermediate goods with cheaper imports increases competitiveness, in turn boosting exports and raising income.
Global trade relations are being put on trial by the new US administration, which has accused countries including Germany and China of having an unfair advantage, vowing to strengthen its domestic economy by putting “America First”.
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Treasury secretary Steven Mnuchin - one of the first of Trump’s cabinet members to negotiate policy in an international arena - prompted finance chiefs from the world’s leading industrialised and developing nations to drop a pledge to avoid “all forms of protectionism” from a communique last weekend.
Persistent deviations from an import-export equilibrium do not, as is often argued, reflect domestic distortions, but are rather the result of temporary shocks that create gaps in relative competitiveness, the study found.