Trump and Mar-a-Lago Accords

“As currency accords are typically named after re- resorts where they are negotiated, like Bretton Woods and Plaza, with some poetic license I'll describe the potential agreement in the Trump Administration... as the prospective ‘Mar-a-Lago Accord” — Council of Economic Advisers Chair Stephen Miran

- By Kusum Wijetilleke

THIS article will attempt to explain the strategic and economic rationale for the ‘Trump Tariff Plan’.

It is first necessary to appreciate the relationship between a country’s trade deficit and fiscal deficit through basic macroeconomic accounting equations like the ‘Balance of Payments’ Identity (BoPI) expressed as Current Account + Capital Account = 0 and the Savings and Investment Identity (Sal), expressed as Current Account = National Savings - Investment.

The BoPI, a fundamental macro-economic equation, categorises a nation’s international transactions; the Current Account includes the goods and services trade deficit or surplus and net current transfers like remittances; the Capital Account includes the Financial Account, together, they account for things like FDI, Financial Flows (loans, investments), one-time transfers, capital grants, transfers of intellectual property’ licenses, etc.

In the case of both the United States (US) and Sri Lanka, current account deficits are driven by persistent trade deficits, thus in order to satisfy the BoPI equation, the current account deficit must be financed by an equivalent financial (capital) account surplus; both the US and Sri Lanka must borrow from abroad, issue sovereign bonds or attract FDI.