A key currency open economy, with a third of its GDP generated in the external sector, cannot rebalance aggregate demand on a steady and sustained growth path by restricting its participation in global commerce and finance.

America’s incoming administration is facing excessive budget deficits (8% of GDP), a runaway public debt ($36 trillion, 123% of GDP), a widening foreign trade gap ($850 billion, 3% of GDP) and a sharply deteriorating international investment position (-$22.52 trillion, with losses accumulating at a quarterly rate of $1.23 trillion).

And all that is happening in a situation where American resources are being depleted by open-ended international security crises.

Under those circumstances, inward looking policies would only lead to a widening trade gap, rising unemployment and falling incomes, followed by an inevitable trade adjustment with a growth recession of ex ante unknowable amplitude and duration.

As things now stand, the U.S. is looking at narrowing choices in its fiscal, monetary, structural and foreign trade policies.

Tax hikes and spending cuts

On the fiscal side, tax increases and substantial cuts of government spending are needed to stop and reverse a rapid growth of public debt. Preparing for the election year, the current administration has kept government spending growing at an average annual rate of 4% since the beginning of 2023.

The next government will need an easing monetary policy to soften the depressive impact of higher taxes and declining government spending.

Structural policies could support an efficient fiscal restraint. Cutting out excessive bureaucracy, deregulation, and extensive use of labor-saving technology in discharging public services are the main reforms the next government should pursue. Elon Musk has already offered his pro bono services as a “Secretary of Cost Cutting” in the “Department of Government Efficiency.”

America’s foreign trade policies also require major adjustments with countries running excessive and systematic surpluses on their U.S. trades. Based on data for the first nine months of this year, the U.S. goods trade deficit with China, E.U., Japan and South Korea came in at $491.3 billion – accounting for 56% of the U.S. total trade deficit.

That is an unforgivable error of American trade policies run by a unit operating in the Executive Office of the President.

But it would be another grave mistake to deal with those huge trade imbalances by imposing tariff and non-tariff barriers, as President Trump threatened during the election campaign.

That would raise prices in U.S. markets and make impossible credit easing to protect employment and incomes under conditions of rising taxes and declining government spending. And that gloomy outlook would negatively affect business and consumer confidence – a very dangerous development in the run-up to next mid-term legislative elections in 2026, when all 435 seats in the House of Representatives and 33 seats in the Senate will be contested.

Hit surplus runners and talk to Moscow and Beijing

A much better way to address America’s trade deficits with large surplus runners would be to keep free trade -- but unconditionally require a narrowing of trade deficits with increasing purchases of U.S. goods and services.

That should be easy to do for a president who wrote “The Art of the Deal.” The fact that U.S. exports to China account for one-third of China’s sales to U.S. looks like we have nothing to sell – or, worse, that U.S. is simply humiliated as a trade partner. In the case of E.U., Japan and South Korea U.S. exports are one-half of what those countries are selling to the U.S.

Again, based on data for the first three quarters of this year, squaring trade accounts with those countries would generate half a trillion dollars of American exports. And the free trade would be preserved with a warning to inveterate “trade free riders,” trade deficits would not be dragging down the U.S. economic growth, and America’s price stability would allow supportive monetary policies.

The overriding consideration here is peace and an end to the drain on American resources by trans-Atlantic “free defense riders” -- in cases where American security and national interests are not directly involved. The U.S. could then have more means to keep updating its defense capabilities, with a clear understanding that a nuclear war is an unthinkable threat to humanity.

A deal with Russia to secure its western borders is an urgent matter to review and stabilize the European security architecture. And so is the end to the vacuous play with the One-China policy and the South China Sea navigation and overflight.

Those two deals should be cornerstones of the new world order.

President Trump’s intention to make a deal with Russia and China is – in his own words -- a legacy issue from the first days of his first administration. He is knocking on an open door. It’s time to finish the job.