Executive Order 13786: Trade Deficits

What the Executive Order Says

Executive Order (EO) 13786 is entitled "Omnibus report on significant trade deficits" and has 3 sections.  This EO was originally issued on March 31, 2017 and there have been several additional EO's regarding the topic of trade since then.  In the commentary I will do a bit of a review of the subsequent EO's and try to summarize and critique the theme that is being pursued by this administration.

Section 1

This section outlines the policy of the current administration.  They feel that the trade deficit needs to be eliminated.  Some of the perceived benefits of this include more domestic manufacturing and hence more well-paying jobs.  The causes of the deficits include perceived unfair trade practices by other countries.

Section 2

This Section mandates that a report is produced to determine the causes of the trade deficit and identify specific countries which may be using unfair trade practices that are exacerbating the trade deficit.  Also, the report needs to review the defense industry to assure that trade practices are not creating national security vulnerabilities.

Section 3

This section has the usual fine print to assure that the EO is constitutional.

My commentary

To start, I want to throw out a disclaimer.  I am not an economist, so I may well have some of this wrong, but I have tried to think it through to the best of my ability.
The stated $700 billion trade deficit represents about 3.5% of GDP.  To eliminate this, either imports have to drop or exports have to rise.  If you are going to reduce imports, that can be accomplished in one of two ways.  Either prices paid by consumers have to rise to a level such that domestic manufacturing of those items is profitable, or domestic manufacturing has to be subsidized or labor costs have to be reduced to the necessary extent so that it is price competitive with imports.  Raw material cost is assumed to be equal for both domestic and foreign manufacture because markets for materials are largely global and variances in costs are due to local taxes.  If you let prices rise, this is inflation and correspondingly, it will create pressure to raise wages...there is danger there that it could spiral out of control.  If you start to subsidize industries that are not competitive, this starts a trade war and is antithetical to the concept of a free market.  Subsidies have to be paid by taxes, so here you end up with a tax hike.  Trying to raise exports runs into similar problems, so there is no magic bullet in terms of policy that can shift the balance without suffering in some way.  Perhaps some measures for both sides can result in some shrinkage of the trade deficit, but any attempt to capture the full 3.5% in a short period will be an economic shock.  There is an article in the Economist Magazine of May 12th that discusses this at some length.
One of the knock-on effects of the trade deficit is that foreigners are trying to find a safe place to stash all the US dollars that they are earning.  This has resulted in foreign ownership of a large part of the bills and bonds by which the Federal government has financed the budget deficits over the past 20 years.  If this in-flow of money were to stop, interest rates paid on US Treasury bills and bonds would rise significantly leading to a budget crisis and potentially hyperinflation.
Innovation and productivity growth appear to be the best ways to address the labor cost imbalance between the US and other countries.  However, this is trending towards automation of manufacturing processes (for example using robots) and the net result of that is a loss of jobs.  Without government intervention, the trend will be towards a two-tier society of have's and have-not's.
This topic has been the subject of several other subsequent EO's and this was a theme of the election campaign for the current administration.  I've written about these here, here and here.  Creating jobs through the government's levers of action is difficult, short of just directly hiring more people, but the President also has to fight the headwinds of the conservative movement who want to stop government intervening in the economy.  Clearly the President's team has no real underlying policy plan nor even an underlying philosophy that would inform the generation of a policy plan.  The ideas that have been floated have come from across the spectrum of thought: leaving NAFTA, reducing taxes, infrastructure stimulus but using other people's money.  It is incoherent populism signifying nothing and now with the political turmoil paralyzing Congress, unlikely to achieve anything either.

Update on previous post

Update regarding EO 13800 on Cybersecurity: I received and email from the Social Security Administration (SSA) that they are adding a second method of 2 factor authentication for logging into the SSA website.  Now you can select either a cell phone text message or as of June 10, 2017, a code sent to your main email address.  Of course, using the email message method, people need to realize that they should use different passwords for pretty much every single account.  Keeping track of all the various passwords can become a hassle and there are various methods I have seen.  One is to have a notebook to write all this stuff down in.  Some browsers have add-in password managers.  One person I know has a password protected and encrypted XL sheet that they keep all their passwords in.  Nonetheless, this is a good step forward and if you have not done so, you should turn on two factor authentication.