President-elect Donald Trump's obsession with tariffs reflects a deep-seated antipathy toward trade and trade deficits. about himn words“Trade deficits have a very negative effect on the economy.”
Is the trade deficit really a problem for the US economy? debatable. But either way, in most cases, Economists oppose the introduction of tariffs It seeks to address this problem by arguing that higher tariffs would raise inflation, lower real wages, kill jobs, disrupt the global economy, and weaken relations with allies. Moreover, no one knows how much, if any, the trade deficit will be reduced by higher tariffs.
There are far better ways to reduce the trade deficit while addressing the country's economic challenges. It's about reducing the federal budget deficit.
Tariffs are nothing but taxes on imported goods brought into the United States. Customs duties are paid by the importer, and unless the importer absorbs the additional costs in the form of lower profit margins, the costs are passed on to the final purchaser. (President Trump's claim that foreign exporters will lower prices in response to our tariffs is Thoroughly debunked.) This will motivate households and businesses to switch from purchasing imported goods to purchasing domestically produced goods. As a result, imports will decrease, domestic production will increase, and the negative balance of trade (exports minus imports) will decrease. That's nice! What could go wrong?
First, the above discussion assumes that tariffs will be increased for all trading partners. 10-20% customs duty Trump made this promise during his campaign. But he also has a hit list of personal accounts. Mexico, Canada, China — that incurred his wrath. Tariffs on China alone (or any other country) can be avoided by bypassing exports through a third country. As a result, the bilateral trade deficit with China will decrease, but it will increase with other countries, leaving the overall trade balance almost unchanged. Alternatively, even without this tariff avoidance, other countries could regain market share that China has lost.
Second, by raising domestic prices, tariffs encourage the Federal Reserve to keep interest rates high. make the dollar more attractive It becomes more valuable to foreign investors and more valuable against other currencies. This would make imports cheaper and exports more expensive, reversing some of the deficit reduction caused by tariffs. No one knows how much the dollar will rise. I used to be in charge of forecasting exchange rates at the Federal Reserve, and I don't think the dollar has ever appreciated. random walk. However, some increase is possible.
Third, imports may be less responsive than generally assumed. Import cost efficiency remains even after tariff increases, either because of very low wages abroad (toys and clothing), differences in natural supplies (bananas), or accumulated expertise and infrastructure (semiconductors) There are many products available.
Finally, higher tariffs are likely to affect U.S. exports and not just because of a stronger dollar. The price increase of imported raw materials due to tariffs is increase production costs For many companies, it reduces their competitiveness in foreign markets. And of course, the increase in tariffs here retaliation Increased tariffs on U.S. exports overseas will further weigh on U.S. exports.
In summary, the impact of tariff increases on the trade balance is complex and difficult to predict, but the reduction in the trade deficit is likely to be lower than initially expected. In fact, nearly all of the tariff offsetting factors mentioned above became clear after President Trump's 2018-2019 rate hikes. The trade deficit was completely unchanged.. Of course this is just one episode, but according to the analysis; IMF researchers in 151 countries It has been confirmed for decades that tariff increases have little effect on the trade balance.
Is there a way to reduce the trade deficit that is effective and promotes the nation's long-term economic prospects? Yes, reduce the federal budget deficit.
At the moment, budget deficit This is equivalent to about 7% of GDP, an abnormal number in a period of economic expansion. reflects borrowing to cover the budget deficit; federal debt It accounts for almost 100 percent of GDP and is expected to reach 150 percent by mid-century. This is clearly unsustainable, and the sooner action is taken to reduce the deficit, the less disruption there will be to the economy and the more resources will be available for private sector investment.
However, reducing the budget deficit will also raise the level of national savings, and as long as the trade deficit reflects spending that exceeds our income, Budget cuts also lead to a reduction in trade deficits. If President Trump was serious about rebalancing the economy, he would forget about tariffs and focus on getting the economy back on track.
Stephen Kamin is a senior fellow at the American Enterprise Institute, where he studies international macroeconomic and financial issues.
