Mission Impossible: Tariffs Didn't Reduce The Trade Deficit (Deals Won't Either)

Trump is on an impossible mission. Tariffs will not reduce the trade deficit and will likely make matters worse.

To fully understand Trump's trade dilemma, consider the following chart.

Trump's Current Account and Trade Deficit Problem in One Picture

(Click on image to enlarge)

Identity

Government Saving + Private Saving = Exports - Imports

The identity is not debatable, but it is misunderstood.

Exports and imports are not just about trade. One must factor in capital, thus my annotation about foreign direct investment.

For the government "saving" component, pencil in deficits in excess of $1 trillion dollars for five years.

Projected Deficits vs Projected Increase in Debt

(Click on image to enlarge)

For more details, please see my post Projected US Budget Deficit Lie in Four Pictures.

The important point as relates to this article is the increase in debt is the true deficit.

This happens because the projected deficit does not include all of the amount owed to the Social Security Trust Fund. That amount is called off-budget. But when the calendar year rolls over, the difference magically appears on the balance sheet as actual debt.

Trump Tax Cuts

Regardless of what you think of them, the Trump tax cuts, unaccompanied by spending cuts dramatically increased deficits.

That money has to come from somewhere.

Tariffs Not the Answer

Tump's Tweet is absurd in theory and practice. The deficit has risen since Trump went on his "Tariff Man" binge.

Options

  1. Increased consumer saving (fewer consumer purchases)
  2. Increased business saving (lower capital spending)
  3. Increase in the trade deficit
  4. Increase in direct US Investment from abroad
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