The trade deficit is a sign of strength, no weakness

No one knows. But that seems certain. To produce a significant reduction in the trade deficit – which, most of the days, seems to be the president’s main motivation – the prices must be serious and prolonged enough to they TO DO cause a recession.

“I do not see how without recession, we are considerably moving the trade balance,” said Maurice Obstfeld, principal researcher at the Peterson Institute for International Economics.

Unlike the implicit reasoning of Trump’s economic team, commercial imbalances are not caused by relative rate levels (American prices are on a peer With those of Canada, Japan, Europe and Mexico – all among Trump’s targets). On the contrary, commercial imbalances arise from relative differences in the amount of countries that save and invest and from their underlying productivity.

The fact that the United States can exchange dollars (which we print without restriction) for Toyotas, Lawyers and Bordeaux wine is a sign of strength, No weakness.

The use of prices to eliminate the trade deficit will risk undermining American forces. Talk about a worse remedy than disease.

Far from being scammed, Americans benefit from the importation of cheaper and / or better goods, which improves our quality of life in multiple ways. In addition, trade is part of a circular movement not only of goods but also of money. The United States Trade deficit of $ 918.4 billion Last year was the mirror image of A capital surplus of $ 918.4 billion, or infusion from abroad.

Sooner or later, all 918.4 billion net dollars that Americans spent in foreign products were invested in American capital assets such as stocks, real estate, bonds or short -term assets such as cash bills.

If foreigners had no appetite to invest in the United States, the trade deficit could not exist. For example, if Venezuela wanted to finance imports by selling investments in its local stock market, it would not be lucky. International capital markets have no little about this kind of faith in Caracas.

But markets have a lot of confidence in the US dollar and in American investment opportunities. In recent decades, even with Americans who send all these dollars abroad, the value of the dollar has generally increased.

A related reason for the trade deficit is that America has a low savings rate. In a closed economy, investment is equal to savings (just as a family can only invest what remains of its income after spending).

But global savings are not closed (or were not, while waiting for the full impact of the “beautiful” Trump prices). Investment in an economy like the United States is equal to what we save more what foreigners invest in the United States-these 918.4 billion dollars.

Thanks to our open markets and our entrepreneurial culture, we have enough investment opportunities to attract nearly 1 billion of dollars in excess savings from the rest of the world. That is to say still a force, not a weakness. Foreign capital reduces American interest rates and increases the American standard of living. It contributes to higher productivity, higher growth, And Reducing unemployment than in almost any other developed economy.

It is impossible to say if the United States has a trade deficit “because” other nations are impatient to lend or “because” we are impatient to borrow. Obstfeld rightly rejects this chicken and egg debate as “The game of commercial deficit blame.”

But it is undoubtedly clear that if you want to reduce the trade deficit, you must reverse or decrease, these capital flows – which means that foreigners are less willing to invest in the United States or to encourage Americans to start saving more and borrow less.

Trump could take significant measures against the trade deficit by reducing the government’s deficit, which would add to national savings. Of course, its signature tax objective, pursuing its previous tax discounts, goes in the opposite direction.

But prices generally have no correlation with commercial sales. Trump’s first mandate rates did not reduce the American trade deficit. One of the reasons is that other nations have retaliated. Thus, during Trump 1.0, the foreign rates imposed on American agriculture made farmers lose a Estimated $ 27 billion in exports. Similar rates are now taken from the United States. Our imports can drop, but our exports too.

And to the extent that prices reduce imports, Americans will provide fewer dollars on foreign trade markets. This will strengthen the dollar and exert additional pressure on American exports.

The only sure result of the prices is less trade in both directions and (due to increased uncertainty) less investment. As with any tax, economic production will suffer from it. If the prices are relatively minor, as in the first Trump administration, the result is a slightly reduced prosperity.

The new Trump prices, including a 25% tax on cars, are more serious. But for these prices to “work” in the sense that Trump hears, the American economy should be weakened singularly, compared to those of other nations, to realign world capital flows. This would happen if American consumption fell (which means that more of our income has been saved) And Investment in the United States is craters. These two factors would decrease our appetite for foreign capital.

But whenever America undergoes both less investment and less consumption, it is probably in a recession Doozy. Foreigners are currently holding 20% of American shares. If this capital was withdrawn, the result would not be nice for investors in American companies or for their employees. And when we released, the recession capital flows would probably return, as is our taste for lawyers (and the trade deficit).

Why is Trump ready to play American prosperity to combat the trade deficit is a mature question. If it is his fetish “still” – imagining, let’s say, that many millions of factory jobs will arise “again” – he is badly informed. Advanced savings, even those, like Germany, with major commercial surpluses, have seen a part of the factory regularly decreasing. Advanced savings are focused better on greater jobs such as AI and education required for their workers, not on the reproduction of their forces in a futile effort to return to a proto-bronze age. In addition, manufacturers are customers For 45% of American imports; Thus punishing the sectors that Trump imagines that he helps.

Greg Mankiw, economist at Harvard, said he was a shame that the term “deficit” deficit “found common use. It would be just as precise to talk about America as to have an “surplus of investment”, a term that evokes the economic forces of the country.

The question is how far Trump will go to undermine these forces.