Tariffs and trade balance: how Trump validated his critics

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Before Donald Trump became president in 2017, Americans paid tariffs on just 2% of their imported goods. The average tariff rate was 1.7 percent.

In 2018, however, Trump launched his global trade wars. “[W]We have a trade deficit of $ 500 billion a year, ”he tweeted in April 2018.“ We can’t let this continue! It has imposed tariffs on two-thirds of Chinese exports and on metals sold by almost every other country, friend and foe. At the end of that year, Americans were paying tariffs on 15% of their imports. In 2019, the average tariff rate had climbed to 13.8%.

Safer:

US trade deficit

Trade war

NAFTA

United States

As the left-hand figure above illustrates, Trump expected his huge wall of tariffs to push the US current account balance (of which trade is the most important component) upwards, towards a surplus. Yet the reality, as we now know, is that he fell deeper into the deficit.

And what happened to the countries that were the main targets of Trump’s wrath? As shown in the figure to the right, the current account balances of China and the NAFTA partners, Canada and Mexico, are all increase. Mexico’s balance increased by 12.5%. And remember Trump claimed that Mexico had “paid for the wall” by the change in trade flows brought about by its USMCA deal. Nothing more logical or empirically absurd.

So how did Trump get so wrong about the tariffs? Well, first of all, the countries he targeted fired back. Canada and Mexico have imposed tariffs on US metals. And China has imposed tariffs on 58% of US exports. Second, tariffs have hurt the export competitiveness of US companies who have had to pay more for essential intermediate goods imported for use in domestic production. Third, and most importantly, tariffs, in theory and in practice, have little influence on trade balances. Instead, macroeconomic factors, such as fiscal policy, demographics, domestic demand, exchange rates, and supply-side policies such as state subsidies, have a predominant influence.

Most damning, however, is the fact that the trade balance, as we pointed out earlier, has no empirical relationship to GDP growth or employment. This fact means not only that the effort to push it through tariffs is doomed, but that any move towards surplus will not, by itself, improve the economic well-being of a country. Trump therefore committed the double sin of doing the wrong thing for the wrong purpose and harming American industry, workers and consumers in the process.

Safer:

US trade deficit

Trade war

NAFTA

United States


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