US economic imbalance and European reactions

The US Supreme Court's ruling, which declared unconstitutional the tariffs imposed by the President's executive orders on the basis of the International Emergency Economic Powers Act of 1977 (IEEPA), is of great importance in terms of American institutional balances but does not, and could not, enter into the merits of the Trump administration's economic choices. It is of great importance because it re-establishes the general principle that taxes on American citizens must be decided by Congress and, since tariffs are taxes, it is not within the powers of the executive to impose them, except in specific cases and with the limits set by law. At the same time, by declaring the tariffs imposed under IEEPA unconstitutional, the Supreme Court affirmed the lack of the emergency condition invoked by the President. This is an unassailable judgement since the US trade deficit and its consequent de-industrialisation, which were the reasons brought forward to justify the tariffs, do not represent an emergency situation but a structural condition of the American economy since the last century.

But the imbalances in the US economy remain. The American economy, in the substantial absence of domestic savings, thrives on attracting savings from the rest of the world thanks to the dollar's role as an international currency and confidence in the fiscal sustainability of American debt, whose securities, Treasury bonds, are considered global safe assets, and thus the object of international appetite. As well as thanks to the attractiveness of American big tech stocks.

The other side of the coin is that this inflow of savings from the rest of the world results in a demand for dollars, which leads to an overvaluation of their exchange rate and consequently to a structural deficit in the US current account balance and a corresponding structural trade surplus of the rest of the world vis-à-vis the US. In other words, this means that the rest of the world sells more goods to the United States than it buys from them and then invests this surplus in American financial assets, i.e. lends the United States the resources with which it can continue to import in excess of its exports, sustain its investments even in the absence of domestic savings and finance the public deficit that sustains the excess of domestic demand. It is an unstable balance that still allows US citizens to consume too much relative to what they produce, but at the cost of widening both underlying macroeconomic and social imbalances. The financial resources coming into the United States enrich, in fact, the richest social strata, while the continuous loss of manufacturing production impoverishes, above all, the lowest social strata. Trump's response was to declare that this overall 'unstable balance' no longer serves American interests. However, the use of tariffs as a means of correcting the indicated imbalances is a wrong policy choice, partly suicidal, because it does not affect the underlying reasons for the imbalances themselves.

But how will the Supreme Court ruling have a major impact on this policy? Probably not much in the short term, because the Trump administration immediately announced that it would use other legal cover to impose tariffs at least corresponding to the lapsed ones. The effect will be more chaos and uncertainty in world trade and global markets. The question is how the rest of the world, and especially Europe, should react. The EU's first reaction was only to postpone ratification of the agreement reached with the United States last summer on a limit on tariffs (averaging 10 per cent) on EU imports. However, the real answer should be to patiently build an international consensus around a comprehensive trade and monetary negotiation that stabilises the markets and also takes into account the American problems that Trump is addressing in a way that is ineffective, harmful to all and even dangerous. What is needed, in particular, is a negotiation on the exchange rate of the dollar both against the renminbi, the currency of the main rival and trading partner, and against the euro. It will be difficult to involve Trump in this negotiation, even if he is weakened domestically by the probable failure of his economic recipes. In any case, Trump is not eternal and American imbalances must be addressed. The alternative, with or without Trump, is a possible loss of confidence in the dollar that would lead to growing financial instability and an increasingly aggressive and confrontational US policy. China would probably be interested in multilateral negotiations, because it has nothing to gain from chaos and uncertainty, as would the other countries of the 'enlarged' West around Europe, and the other emerging Asian countries. It is the alternative to protectionism and conflict. It may not be an achievable goal in the immediate future, but it could quickly become inescapable.