In Trump’s US and closer to home, decision-makers don’t understand how the global economy really worksby David Henig / January 4, 2019 / Leave a comment
US trade is really quite simple in the eyes of President Trump. As he said in March 2018, “we as a nation lost $817bn dollars on trade. That’s ridiculous and it’s unacceptable.” A trade deficit is bad, and such a big trade deficit particularly bad. Tariffs are the answer, and in this way domestic industries will be protected and the trade deficit will go down.
Trump said in December 2018: “I am a Tariff Man. When people or countries come in to raid the great wealth of our nation, I want them to pay for the privilege of doing so.”
Though it’s unlikely that anyone would use the same language as Trump in the UK, you could extend the argument to UK-EU trade. The UK has a trade deficit with the EU, and therefore the single market is biased against us, but they need us more than we need them. Our trade surplus with countries outside the EU shows why it makes good sense to leave.
All very straightforward, but unfortunately all completely incorrect. Trade deficits, the balance between goods and services exported and imported, are not inherently good or bad. The figure President Trump cited was the only the deficit for goods, ignoring the approximately $250bn surplus the US has in services trade. Tariffs on the other hand impose extra costs and reduce choice for consumers, and are economically inefficient. Increasing them does not necessarily reduce trade deficits, as the US has seen, with its trade deficit increasing in 2018 despite the imposition of various new tariffs.
When discussing the trade deficit it is vital we consider the other related variables, most significantly, inward investment, which is the balance for a trade deficit. Put simply, a country’s trade deficit is offset by the inward flow of capital, which allows the continued operation of such a deficit. Some have suggested we should think of a deficit in a developed country as meaning foreign investors subsidising domestic consumption. Which doesn’t sound like a raid on the wealth of a nation.
Were the suppliers of the capital to lose confidence in a country, as we saw for example in the Asian financial crisis of 1997, then a trade deficit becomes a real issue. In this situation we typically see a currency devaluation…