Since the beginning of his second term, Trump has been more gung-ho on tariffs than he was during his first term. Not only did Trump threaten tariffs on U.S. allies Mexico and Canada under the guise of fighting fentanyl, but he implemented 25 percent tariffs on steel and aluminum. A couple of weeks ago, Trump passed an executive order for reciprocal tariffs. Trump stated that he needed these reciprocal tariffs to deal with the trade deficit, which Trump claims threaten the economy and national security. Too bad for Trump that tariffs do not help with the trade deficit. According to the Peterson Institute for International Economics (PIIE), countries with higher tariffs have higher trade deficits.
Why is this the case? Tariffs lower imports. This decrease in imports lowers demand for foreign currency, which in turn appreciates the dollar (Furceri et al., 2019). What does that end up doing? Making American exports more expensive for foreign consumers, which lowers sales. Plus, when there are retaliatory tariffs in play, the initial tariffs increase the cost of U.S. exports, which have the potential to cost more jobs at home, much like we saw with the tariffs from Trump's first term.
None of this addresses the reality that trade deficits are not a bad thing. Trump bemoaned the trade deficit during his first term in office. In reply, I criticized Trump and explained why we should not be worried. In addition to laying out the description of the macroeconomics of trade deficits, I pointed out how a trade deficit can improve our quality of life and how the U.S. economy grew considerably in spite of running a trade deficit since 1975. There is more to an economy than trade balance, not to mention that the trade balance is not a sound metric for economic health. Ultimately, it does not matter whether Trump is imposing tariffs because of national security, fighting the War on Drugs, or because of trade deficits. Tariffs are not the solution.
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