Moreover, I shared data showing that countries with higher taxes on imports usually have higher trade deficits.
Unfortunately, Trump and his team don’t understand trade. Instead, the president is threatening to unveil massive tax increases today.
Some are calling this “Liberation Day,” but they don’t explain why it is good to have government liberate more of our money.
Let’s continue exploring this issue.
But since yesterday focused on data, today’s column will focus on analysis.
We’ll start with some excerpts from a column by Professor Jeremy Siegel in the Wall Street Journal last month.
President Trump believes a trade deficit is harmful to the American economy because it signifies that the U.S. is buying more goods and services from abroad than we are selling… But there is a more constructive way to look at a trade deficit. The $918.4 billion deficit reflects an equal $918.4 billion capital surplus. …A simple example shows the relationship between trade and capital flows. Suppose an American buys a $40,000 Toyota made in Japan. Toyota has three options for what to do with these dollars. It can buy $40,000 worth of U.S. goods or services, in which case there would be no trade deficit. Or, because it expects the American economy to grow, it can invest $40,000 in U.S. capital—say, the S&P 500 index… What if Toyota doesn’t want to buy U.S. goods or assets? Then it can sell the dollars on the foreign-exchange market. People purchase these dollars either because they want to buy U.S. goods or assets… Imposing excessive tariffs to curb the trade deficit stanches foreign demand for U.S. assets, leading to lower stock prices and higher interest rates for U.S. firms and consumers.
Jason Furman offers similar analysis in a recent column in the New York Times.
My local bookstore has been taking advantage of me for years. I have run a trade deficit, giving it money with nothing but books in return. …Thinking that way about the kinds of exchanges we all engage in is obviously absurd. But that’s precisely the reasoning behind the “reciprocal tariffs” President Trump is expected to announce this week. …Their effect will be lower economic growth, higher inflation, higher unemployment, the destruction of wealth and a tax increase on American families. It will…further empower China. …the one argument Mr. Trump has returned to again and again is that other countries are taking advantage of the United States. He measures the degree to which they are doing so by the magnitude of our trade deficit with them… Every step in this chain of reasoning is wrong. …we attract money from overseas. Foreign investors exchange their euros, yen and yuan for dollars to invest in the United States. …n Mr. Trump’s first term he raised average tariffs by about 1.5 percentage points. …All told, the tariff increases in the first four months of his latest trade war are likely to be five to 10 times as large as those he imposed in the four years of his first term. …The stock market has already lost more than $3 trillion since Mr. Trump first dialed up his tariff threats in February. The losses could grow over time as the United States increasingly distances itself from the benefits of imports, exports and global supply chains. …This week’s tariffs are another step toward hurting the U.S. economy and creating a geopolitical system that increasingly has China at its center.
And he makes a very important point in the above column about how Trump’s myopic policies will rebound to the benefit of China. Which is rather ironic since that’s the one nation that arguably should be punished in the world trading system.
Dan Mitchell is co-founder of the Center for Freedom and Prosperity and Chairman of the Board. He is an expert in international tax competition and supply-side tax policy.
