The economist says that the flaws in free trade were a key factor in Trump's rise in 2016 and these issues persist.

• Trump has suggested a minimum 10% duty on all American imports and a fee of 60% or more on imported Chinese goods.
• Koo stated to Steve Sedgwick of CNBC on the Ambrosetti Forum on Friday that while protectionism is a "terrible thing," Trump's approach has some economic logic.

According to Richard Koo, the chief economist at the Nomura Research Institute, the U.S. economy has too many "losers" due to decades of trade deficits and a strong dollar, which led to the adoption of Donald Trump's protectionist policies. These conditions persist.

Trump's "America First" economic policies resulted in the imposition of trade tariffs on various countries, including a 25% duty on imported steel and aluminum.

Trump, the Republican nominee for the 2024 presidential election, has proposed a 10% tariff on all U.S. imports and a minimum of 60% on imported Chinese products.

Critics argue that tariffs are counterproductive, as they increase the cost of imported goods for the average American, and have drawn widespread criticism from economists.

Koo stated to Steve Sedgwick of CNBC on the Ambrosetti Forum on Friday that while protectionism is a "terrible thing," Trump's approach has some economic logic.

"Our economics and free trade studies taught us that while free trade can result in both winners and losers in the same economy, the gains of the winners are always greater than the losses of the losers, resulting in a net gain for society as a whole. Therefore, free trade is beneficial," he stated.

Koo contended that the assumption that trade flows are balanced or in surplus is flawed, as the U.S. has been running huge deficits for the past forty years, which have increased the number of "losers."

The large number of people who viewed themselves as losers of free trade in 2016 elected Trump president, prompting us to reflect on what we did wrong to allow so many Americans to feel this way.

The exchange rate was a major issue for Koo, as the strong U.S. dollar encouraged foreign imports and harmed U.S. companies exporting globally.

Koo stated that the foreign exchange rate should be set in a way that the number of losers does not increase to the point where free trade is lost, while allowing market forces, speculators, clients, and Wall Street types to determine the exchange rate.

In 1985, President Ronald Reagan confronted a similar pivotal moment when he had to deal with the issue of a strong dollar and rising protectionism. To address this, he facilitated the Plaza Accord with France, West Germany, Japan, and the United Kingdom, which involved depreciating the U.S. dollar against the respective currencies of these countries through intervention in the foreign exchange market.

We should have been more mindful of our actions, such as not letting the dollar fluctuate freely in the market, which ultimately led to the suffering of those less fortunate in the financial markets, resulting in their support for Mr. Trump.

He contended that economists must abandon the notion that the trade deficit is solely due to "excessive investment" and "insufficient savings" in the U.S., as this implies that the deficit can only be reduced by remaining in recession until domestic demand weakens so much that U.S. companies can export more goods, which is not feasible in a democracy.

Koo argued that if the claim was that foreign companies are merely replacing U.S. companies' inability to meet domestic demand, then American companies that battled Japanese firms in the 1970s and 70s should have made significant profits due to the excess demand.

"However, the opposite occurred. Numerous businesses went bankrupt, and many individuals who lost out on free trade were left without resources. The issue was not related to savings and investment, but rather the exchange rate," he stated.

"Reagan understood that the dollar should have been much weaker, so he took that action."