Trump trade policy ungrounded in economics, oblivious to history

UPI Photo

As President Trump slaps increased import tariffs on China as well as on U.S. allies like Canada, Europe and Mexico, he consistently cites the U.S. bilateral trade deficit with these economies as a reason for his actions. In his mind, increased import tariffs will reduce that deficit and in the process will increase U.S. jobs at home. 

Sadly, the president’s assertions on trade do not stand up to economic analysis for the following four reasons.

First and most importantly, President Trump’s objective of reducing the U.S. trade deficit, is at marked odds with his expansionary budget policy.

{mosads}By engaging in an unfunded tax cut that will increase U.S. debt by $1.5 trillion over the next decade and by going along with a $300 billion public spending increase, President Trump’s budget policies are sure to increase the budget deficit and reduce public savings.


As we should have learned from our experience in the 1980s, reducing the country’s savings level through a reckless fiscal policy risks taking us back to the twin deficit problem of those years. This is because arithmetically a country’s trade balance is the difference between its saving and its investment rates. 

If the Trump administration truly wanted to reduce the country’s trade deficit, it would not be running an expansionary fiscal policy at this late stage in the cycle. Rather, it would target policies that would improve the country’s public finances and thereby increase the country’s savings rate.

Second, as both China and the Europeans have made clear, they will retaliate in kind to increased U.S. import tariffs by increased import tariffs of their own. If they do, it is difficult to see even according to the president’s logic how increased U.S. tariffs would improve the U.S. trade deficit.

What the U.S. might gain in terms of an improved trade balance from imposing tariffs, it would lose by having other countries impose retaliatory tariffs of equal scope on U.S. exports.

Third, a strengthening of the U.S. dollar is the last thing that the Trump administration needs if it wishes to improve the trade deficit. This is because a strong dollar would discourage U.S. exports and incentivize U.S. imports.

Yet, a strong dollar is precisely what the administration will get by its expansionary fiscal policy and by its increased  import tariffs on its allies.

By following an expansionary budget policy at this late stage of the cycle, the administration is in effect forcing the Federal Reserve to raise interest rates at a faster pace than it would otherwise have needed to do to stave off inflation.

At the same time, by undermining investor confidence abroad by threatening additional import tariffs, especially on automobiles, the administration is inducing central banks abroad to keep interest rates low to support their economies.

With interest rates at home rising and those abroad in Europe and Japan staying unusually low, it should come as no surprise to the administration if the dollar keeps on strengthening.

Fourth, even if one conceded that a trade deficit involves the U.S. losing jobs abroad, can it really be argued that eliminating the trade deficit will increase employment at home? With the U.S. economy now operating, in the words of the Federal Reserve, at or above full employment, where would the additional workers to fill those jobs be found?

Would not eliminating the trade deficit simply add to inflationary pressures at home without further reducing unemployment?

A trade policy approach not grounded in economics and seemingly oblivious to the disastrous experience with beggar-thy-neighbor policies of the 1930s is reason enough for serious concern.

However, there is the real risk that when President Trump’s expansive fiscal policy lead to an increase rather than to a reduction in the trade deficit, he will double up on his restrictive trade policy approach.

If that occurs, we should brace ourselves for a full scale global trade war with all of its adverse consequences for the U.S. and global economies.

Desmond Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.

Tags Balance of trade Customs duties Deficit spending Donald Trump Economic policy of Donald Trump economy Fiscal policy Foreign trade of the United States Government spending International relations International trade Tariff World economy

More Finance News

See All
See all Hill.TV See all Video