The G7 and IG Report

Later today the news will be dominated by the long awaited Inspector General (IG) report. We don’t expect the blockbuster in it that others do, but there will be some interesting information. So, as we await that release let’s talk a little about that G7 meeting and all the controversy since.

The issue begins with this.
In 2017 the U.S. imported $568.4 billion more than it exported. This is the largest such deficit of any country in the world. In fact, the last year we had a trade surplus was 1975 ($12 million). The first trade deficit with China was in 1985. Today they are the largest deficit we have with any nation.

Now President Trump believes that the deficit is causing the U.S. jobs. He wants more manufacturing opportunities in the U.S. He believes attacking the deficit can do that. He further believes that tariffs on U.S. goods exported to other countries are an impediment to us being competitive. These tariffs he says, increase the cost of our products, while they ship goods here without a tariff.

So to enhance his negotiating position, the President picked the aluminum and steel industries to put tariffs on foreign imports. This has angered others, and they have threatened to increase their tariffs and start a trade war. That’s the basis of the tension for the G7 meeting.

Now we believe the President did this strictly as a negotiation position. The fact the other countries haven’t caved shows the concern they have that he might expand the product line. Thus a stalemate and potentially harsh economic situation could arise if no one blinks.

The President upped the ante by bringing back up NATO funding and the need for others to pay their fair share. The verbal agreement for NATO is each participating country will pay 2% of their GDP to fund the troops. A few do (The U.S., Greece, Eastonia, UK and Poland). The rest don’t.

Trump is arguing that the U.S. is being taken advantage of and this must end. They should pay for their agreed to share of their own defense, he says. Here are two tweets from him following the G7 that lay out his position:

Germany pays 1% (slowly) of GDP towards NATO, while we pay 4% of a MUCH larger GDP. Does anybody believe that makes sense? We protect Europe (which is good) at great financial loss, and then get unfairly clobbered on Trade. Change is coming!

“Why should I, as President of the United States, allow countries to continue to make Massive Trade Surpluses, as they have for decades … (while) the U.S. pays close to the entire cost of NATO-protecting many of these same countries that rip us off on Trade?”

There you have the basis of the current dispute. He sees America as being taken advantage of  by allies who get a near free ride on defense as they take advantage of us with trade.

We believe the President has a point on NATO funding. The world economics are different today than the days after WW2 and others can pay their fair share. The manner in which he says things and attacks others personally is where he is losing the impact of the message.

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