Trump’s Obsession with Trade Deficits Has No Basis in Economics. And It’s a Bad Reason for Tariffs

An alternative example of the case for tariffs is the steel industry. Many countries believe that they should have a steel industry for strategic reasons, but also because steel is an input into so many aspects of the economy.

There have also been concerns globally in the industry  about the pricing of Chinese steel, and whether it should attract tariffs to balance what is seen as unfair competition. Chinese steel receives subsidies from the Chinese government, after all.

While this may be a valid concern, it also forces governments to make choices about what they see as “strategic industries”. A good example of this is the desire to protect steel jobs in richer countries, in contrast to the willingness to import cheap clothes from Asia in order to keep inflation down.

This is typically why, if tariffs are used at all, they tend to be targeted to certain industries.

The Wrinkle in Trump’s Plan
So will the US tariffs plan work? Unfortunately for Trump, the answer is probably not. This type of trade policy has been tried, but has seldom been shown to be effective.

The second point is whether the president of a large global power should be concerned about its trade balance with another country. Unless he believes that the country is engaging in large-scale subsidy in order to dump goods on foreign markets, the answer is almost certainly no.

Casual inspection of trade statistics for the US and Canada suggests that the most common exports from Canada to the US include crude petroleum, petroleum gas, refined petroleum and motor vehicle parts and accessories.

Tariffs on the first three will simply push prices up for US consumers. The last one demonstrates, often to the frustration of policymakers who seek to intervene on trade, that there is little that governments can do to influence modern supply chains, unless they seek to break them all together.

Firms will locate activities based on combinations of efficiency and where their customers are. So seeking to change these patterns through tariffs will simply increase the cost of imported inputs and make production in the US less competitive.

In simple terms, complaining that you have a trade deficit with one country is like complaining that you have a trade deficit with your corner shop. They sell you things, you give them money, but they never buy from you. They provide goods that you want for money that you earn elsewhere.

You could shop elsewhere (and have a deficit with the new shop), you can give up your job and even grow your own food. But were you to impose a “tariff” on your corner shop, it would simply put up the prices that you have to pay.

That the US has a trade deficit is not a sign that the rest of the world is “ripping it off”. It is a reflection of an affluent society with relatively high wages buying products from countries that can produce them more cheaply. Trump’s tariffs will hurt Americans first – basic international economics is clear on that too.

Nigel Driffield is Professor of International Business, Warwick Business School, University of Warwick. This article is published courtesy of The Conversation.