Tariffs and trade balance: how Trump validated his criticisms

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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! He 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 massive tariff wall to push the US current account (of which trade is the most important component) up, towards excess. 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 on the right, the current account balances of China and NAFTA partners, Canada and Mexico increases. Mexico’s balance rose 12.5 percent. And remember Trump claimed that Mexico had “paid for the wall” with the change in trade flows brought about by its deal with USMCA. Nothing more logically or empirically absurd.

So how did Trump get tariffs so wrong? Well, first of all, the countries he was targeting retaliated. Canada and Mexico have imposed tariffs on US metals. And china imposed tariffs about a whopping 58 percent of US exports. Second, tariffs undermine the export competitiveness of US companies that have had to pay more for essential intermediate goods imported for 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 policies such as government subsidies – have a predominant influence.

Most damning, however, is the fact that the trade balance, like us highlighted previously, has no empirical relationship to GDP growth or employment. This fact means not only that the effort to get it through tariffs is doomed to failure, but that any move towards a 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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