The relationship between tax cuts and the U.S. economy's external sector is simple: A reduction of income tax liabilities raises households' disposable income, which drives personal consumption, residential investments and, indirectly, business capital outlays — the main segments of the economy that represent 85 percent of America's GDP. All that new purchasing power then leads to rising demand for imports, while the expanding domestic markets lower the pressure on businesses to sell their goods and services abroad.The result is a deteriorating trade balance: a decline of a trade surplus, or, most frequently, an increase in trade deficits.That is the likely scenario one can expect from tax cuts the U.S. Senate passed last Friday. One can, therefore, easily imagine that the Chinese , Japanese and German exporters to the U.S. are very much looking forward to rising sales orders from their American customers. And that now comes on top of their already good business with the U.S. In the first nine months of this year, those three countries were running a combined surplus of $372 billion on their U.S. trades. That is nearly two-thirds of America's total trade deficit, and an increase of 4 percent from the same period of 2016.Raising US exports would be a better stimulusThe U.S. foreign trade numbers will get worse for the rest of this year, because they will be reflecting rising sales of imported goods during the main retailing season. A preview of that development was offered last September by a 6 percent annual increase of the combined U.S. trade deficit with China, Japan and Germany. Does that mean that a multi-billion dollar gift to our key trade partners will be an unintended consequence of what President Donald Trump called "big, beautiful fat tax cuts?" A consequence it will be, but it won't be unintended because somebody should have explained to the president what would happen to America's big, ugly and damaging trade deficits once the flammable combination of tax cuts and exceptionally loose credit conditions is put in place.If that were done, lights could have probably come up. An adjustment of tax policy was certainly necessary to remove competitive impediments to U.S. businesses and prevent tax avoidance by stashing profits overseas. But a massive fiscal stimulus at the time when the economy is driven by a huge monetary creation way above its potential (and noninflationary) growth rate of 1.5 percent is an entirely different matter.The irony is that this apparently vote-grabbing tax cut is a time bomb that can blow up anytime in the run-up to mid-term Congressional elections in November 2018. And that indeed would seal the faith of the Trump administration and compromise the Republicans' hold on power. The trigger, as always, could be easily unhinged inflation expectations and a rising public sector borrowing requirement. That would force the Fed's hand in a highly charged atmosphere of widely anticipated interest rate increases. Unraveling financial markets would then darken the economic outlook and set in motion an ominous political process.Versions of that scenario have been in the markets for some time. I never subscribed to them because I thought that we would be seeing corrections of the tax code to (a) discourage outsourcing, (b) stimulate investments at home and (c) bring back the corporate profits that were kept abroad as a result of an allegedly unfair tax regime in the U.S.Trump should do trade tweetsBut the sweeping pro-cyclical tax cuts we see now are a different story. It is not just bad economics. Sadly, the whole thing looks like a prelude to a financial crisis and an economic downturn that could relegate America to long, long years of economic stagnation and serious security challenges.I hope I am dead wrong.Meanwhile, we are piling on net foreign liabilities — $7.93 trillion at the latest count — failing to even out the playing field for American companies in the key world markets and tolerating trade imbalances that are killing our exporters and import-competing industries.That's not what Trump promised. Remember, he pledged to fight for lower trade deficits and a more liberal access to foreign markets by American exporters. That would have been a better and a more sustainable economic stimulus than the destabilizing and deficit-financed tax cuts the U.S. can't afford. But that's not what we are seeing.Start with Germany. The German trade and industry association just raised the GDP growth forecast for this year to 2.3 percent, from 1.8 percent estimated last October — on the strength of German export sales. The country is run by a caretaker government desperately looking for coalition partners in exploratory talks, where there have never been any publicly available reports of discussions concerning Germany's excessive, literally beggar-thy-neighbor, trade surpluses.What is Washington saying to that? Nothing. With China, the U.S. is trading "help" in dealing with North Korea for a more lenient treatment of Beijing's $350 to $400 billion surpluses on American trades. The Chinese must be laughing their heads off. They are telling Washington that the solution to the region's crisis is for the U.S. to get out of the Korean Peninsula. Or, less radically for starters, to stop massive military mock invasions of North Korea to bring Kim Jong Un's regime to the negotiating table. Ultimately, the outcome of those talks must be some kind of U.S. withdrawal to make way for the Korean rapprochement and eventual unification.Beijing is telling Washington the same thing about maritime border disputes in the South China Sea and broader policy issues in the rest of Asia: Countries outside the region (meaning the U.S.) should stay out of Asian affairs.And here is what we heard this past week. The State Department spokesperson said last Friday that "we have a strong relationship with China." At the same time, Beijing is railing against Washington's dumping suits, holding up of approvals for China's investments in the U.S., and America's opposition to China's market economy status — an all-important trade issue for Beijing.Does that really look like a "strong relationship?"The U.S. must focus on reducing excessive trade deficits with China, Japan and Germany within the regulatory framework of the World Trade Organization. Friendly relations can help, but trade balances are not nickels and dimes issues. Security problems are entirely different and separate matters.Investment thoughtsA fiscal stimulus through generalized tax cuts is unnecessary, and destabilizing, in an economy running substantially above its 1.5 percent potential (and noninflationary) growth on the steam of exceptionally loose monetary policy.Stronger growth of America's domestic demand will leak out through trade accounts to benefit the surplus countries. Mirroring those events, increasing trade deficits will continue to raise American net foreign liabilities and political tensions with key trade partners, such as China, Japan and Germany.A defensive investment posture is in order. U.S. markets are facing rising demand pressures, increasing public debt and budget deficits, weakly anchored inflation expectations and the need for the Fed's incoming leadership to clarify its price stability commitments.Commentary by Michael Ivanovitch, an independent analyst focusing on world economy, geopolitics and investment strategy. He served as a senior economist at the OECD in Paris, international economist at the Federal Reserve Bank of New York, and taught economics at Columbia Business School.For more insight from CNBC contributors, follow@CNBCopinionon Twitter. The relationship between tax cuts and the U.S. economy's external sector is simple: A reduction of income tax liabilities raises households' disposable income, which drives personal consumption, residential investments and, indirectly, business capital outlays — the main segments of the economy that represent 85 percent of America's GDP. All that new purchasing power then leads to rising demand for imports, while the expanding domestic markets lower the pressure on businesses to sell their goods and services abroad. The result is a deteriorating trade balance: a decline of a trade surplus, or, most frequently, an increase in trade deficits. That is the likely scenario one can expect from tax cuts the U.S. Senate passed last Friday. One can, therefore, easily imagine that the Chinese , Japanese and German exporters to the U.S. are very much looking forward to rising sales orders from their American customers. And that now comes on top of their already good business with the U.S. In the first nine months of this year, those three countries were running a combined surplus of $372 billion on their U.S. trades. That is nearly two-thirds of America's total trade deficit, and an increase of 4 percent from the same period of 2016. Raising US exports would be a better stimulus The U.S. foreign trade numbers will get worse for the rest of this year, because they will be reflecting rising sales of imported goods during the main retailing season. A preview of that development was offered last September by a 6 percent annual increase of the combined U.S. trade deficit with China, Japan and Germany. Does that mean that a multi-billion dollar gift to our key trade partners will be an unintended consequence of what President Donald Trump called "big, beautiful fat tax cuts?" A consequence it will be, but it won't be unintended because somebody should have explained to the president what would happen to America's big, ugly and damaging trade deficits once the flammable combination of tax cuts and exceptionally loose credit conditions is put in place. If that were done, lights could have probably come up. An adjustment of tax policy was certainly necessary to remove competitive impediments to U.S. businesses and prevent tax avoidance by stashing profits overseas. But a massive fiscal stimulus at the time when the economy is driven by a huge monetary creation way above its potential (and noninflationary) growth rate of 1.5 percent is an entirely different matter. The irony is that this apparently vote-grabbing tax cut is a time bomb that can blow up anytime in the run-up to mid-term Congressional elections in November 2018. And that indeed would seal the faith of the Trump administration and compromise the Republicans' hold on power. The trigger, as always, could be easily unhinged inflation expectations and a rising public sector borrowing requirement. That would force the Fed's hand in a highly charged atmosphere of widely anticipated interest rate increases. Unraveling financial markets would then darken the economic outlook and set in motion an ominous political process. Versions of that scenario have been in the markets for some time. I never subscribed to them because I thought that we would be seeing corrections of the tax code to (a) discourage outsourcing, (b) stimulate investments at home and (c) bring back the corporate profits that were kept abroad as a result of an allegedly unfair tax regime in the U.S. Trump should do trade tweets But the sweeping pro-cyclical tax cuts we see now are a different story. It is not just bad economics. Sadly, the whole thing looks like a prelude to a financial crisis and an economic downturn that could relegate America to long, long years of economic stagnation and serious security challenges. I hope I am dead wrong. Meanwhile, we are piling on net foreign liabilities — $7.93 trillion at the latest count — failing to even out the playing field for American companies in the key world markets and tolerating trade imbalances that are killing our exporters and import-competing industries. That's not what Trump promised. Remember, he pledged to fight for lower trade deficits and a more liberal access to foreign markets by American exporters. That would have been a better and a more sustainable economic stimulus than the destabilizing and deficit-financed tax cuts the U.S. can't afford. But that's not what we are seeing. Start with Germany. The German trade and industry association just raised the GDP growth forecast for this year to 2.3 percent, from 1.8 percent estimated last October — on the strength of German export sales. The country is run by a caretaker government desperately looking for coalition partners in exploratory talks, where there have never been any publicly available reports of discussions concerning Germany's excessive, literally beggar-thy-neighbor, trade surpluses. What is Washington saying to that? Nothing. With China, the U.S. is trading "help" in dealing with North Korea for a more lenient treatment of Beijing's $350 to $400 billion surpluses on American trades. The Chinese must be laughing their heads off. They are telling Washington that the solution to the region's crisis is for the U.S. to get out of the Korean Peninsula. Or, less radically for starters, to stop massive military mock invasions of North Korea to bring Kim Jong Un's regime to the negotiating table. Ultimately, the outcome of those talks must be some kind of U.S. withdrawal to make way for the Korean rapprochement and eventual unification. Beijing is telling Washington the same thing about maritime border disputes in the South China Sea and broader policy issues in the rest of Asia: Countries outside the region (meaning the U.S.) should stay out of Asian affairs. And here is what we heard this past week. The State Department spokesperson said last Friday that "we have a strong relationship with China." At the same time, Beijing is railing against Washington's dumping suits, holding up of approvals for China's investments in the U.S., and America's opposition to China's market economy status — an all-important trade issue for Beijing. Does that really look like a "strong relationship?" The U.S. must focus on reducing excessive trade deficits with China, Japan and Germany within the regulatory framework of the World Trade Organization. Friendly relations can help, but trade balances are not nickels and dimes issues. Security problems are entirely different and separate matters. Investment thoughts A fiscal stimulus through generalized tax cuts is unnecessary, and destabilizing, in an economy running substantially above its 1.5 percent potential (and noninflationary) growth on the steam of exceptionally loose monetary policy. Stronger growth of America's domestic demand will leak out through trade accounts to benefit the surplus countries. Mirroring those events, increasing trade deficits will continue to raise American net foreign liabilities and political tensions with key trade partners, such as China, Japan and Germany. A defensive investment posture is in order. U.S. markets are facing rising demand pressures, increasing public debt and budget deficits, weakly anchored inflation expectations and the need for the Fed's incoming leadership to clarify its price stability commitments. Commentary by Michael Ivanovitch, an independent analyst focusing on world economy, geopolitics and investment strategy. He served as a senior economist at the OECD in Paris, international economist at the Federal Reserve Bank of New York, and taught economics at Columbia Business School. For more insight from CNBC contributors, follow @CNBCopinion on Twitter.
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