If you tax imports and subsidize exports, the nominal exchange rate adjusts so that those policies don’t end up improving the real exchange rate at all, and thus the trade balance will not improve.
Consider the macroeconomic accounting identity that governs the trade deficit:
Net private saving plus government surplus/deficit = trade surplus/deficit
If you do not change net private saving (household saving plus business saving minus investment) or the government budget, then you cannot change the trade surplus. In order for a tariff on, say, Chinese goods, to reduce the trade deficit, it has to do something to domestic saving. One can come up with channels by which this would happen, but those may or may not operate. If they do not operate, then what you get is a movement in the exchange rate that offsets the effect of the tariff. The design of the tariff might cause the composition of consumption and production, but the overall trade deficit will not be affected.
Which is fine, because there is not much reason to care about the trade deficit in the first place.
Well if you assume it won’t change, it won’t change. File this under useless tautologies. The moral, don’t look for immediate results, but for change in policies to change future actions. Those who care about wealth as much as consumption would differ, and Trump would be among those, though at this stage it is more likely to backfire which is why it is unlikely.
Not really what he said.
The point is, in order for protectionist policies to reduce the trade deficit they have to be accompanied by an increase in saving, either by the public or by the state, and there is no reason to assume that protectionist policies would cause either.
Also, I would note that, under some circumstances, even with a net increase in saving, there still may be no decrease in trade deficit. For example, if some foreign goods are Giffen goods, then tariffs may actually lead people to consume less of their domestic substitutes. Or, if many domestic producers respond to protectionism by simply increasing prices, without increasing production, or even decreasing production, and therefore domestic consumption as well.
Those are just residuals. No one should expect immediate changes but .. does a company looking to offshore production suddenly facing higher costs to do so not reconsider, even if they still decide to do so? Does some other company not decide to if they figure they can? If we can raise tariffs and nothing changes we should by all means do so since that would be a most efficient tax and yes, increase govt saving. This would have made much more sense 20 years ago though.
In order for a company to relocate production to the US, foreign production does not merely need to get more expensive; it needs to get more expensive than domestic production. In the extreme case, where domestic labor is X dollars per unit more expensive than foreign labor, then any tariff less than $X per unit will cause no relocation; it will simply lead to an increase in prices of $X.
Also, for some companies, it simply isn’t profitable to produce goods domestically, so a tariff high enough to make domestic production cheaper would just lead them to shut down; this of course could even lead to some Americans (like white collar workers for companies who produce mainly abroad) to lose their jobs.
That factor and the price increases decrease consumption, and therefore tax revenue. So no, it is by no means given that net government saving increases.
Lastly, no, tariffs should not be increased under any circumstance because the trade deficit doesn’t matter anyway.
Assuming your conclusion through accounting identities is still assuming your conclusion.
you’re the one making the assumptions, I’m merely pointing out that those assumptions don’t necessarily hold. Saying ‘but they do t necessarily not hold’ doesn’t vindicate your protectionism.
Isn’t part of the problem that China did increase their saving?
Chinese goods, to reduce the trade deficit, it has to do something to domestic saving.
Reviewing Trump’s speeches, conservative have way under-estimated the dangers of tariffs with China and Mexico. That is what carried him with ex-Democrat WWC voters in 2016 and they are expecting some return of these jobs and communities. (And realize it is not just the jobs but with the factory towns they can rebuild their conservative values.)
I agree that short term the tariffs will probably have little effect on both savings and the economy. (Notice the primary reason the trade deficit has fallen since 2012 is lower oil prices.) But long term with a lot of noise, the tariffs will:
1) Spike inflation and interest rates.
2) Higher interest rates will induce increased savings.
I assumed one reason why the US and developed world interest rates are so low, is China over building so many factories is crowding out other nations investments. Notice how little Apple actually invest in capital structures.
Prediction: there will be no new tariffs of any significance.
A little off topic: Suppose that a tax reform in the US encourages US companies to repatriate cash from foreign subsidiaries. This would put upward pressure on the US dollar. Presumably the dollar would reach a new (temporary) equilibrium under which the trade deficit was larger while the foreign cash flowed home. Note that that cash isn’t just sitting in bank vaults. It is all invested in something, even if it is just liquid financial instruments. So this cash represents US investments abroad. So the tax reform would have the effects of increasing the trade deficit and drawing down US claims on earnings abroad. Why is anyone for it?