Trump’s Looming Deficit Disaster – Desmond Lachman/AEI – Project Syndicate
“What is often overlooked is that the real reason the trade deficit widened under Trump was not tariffs but tax cuts. While Trump was raising import duties, he was also aggressively slashing taxes. The 2017 Tax Cuts and Jobs Act had two major effects: incentivizing investment by lowering the corporate tax rate and increasing the budget deficit, thereby reducing the national savings rate. Consequently, even before the COVID-19 pandemic caused the deficit to surge, it had already jumped from $584 billion in 2016 to $984 billion in 2019.
“The key economic lesson Trump should have taken from his first term is that trade deficits aren’t determined by tariffs but by a country’s spending relative to its production. Or, as John Maynard Keynes put it, trade deficits are driven by the gap between savings and investment. As long as a country saves less than it invests, it will run a trade deficit, no matter how high its tariff wall may be…
“If Trump is serious about reducing the trade deficit, he should rethink his planned tax cuts and focus on devising a coherent strategy to shrink the budget deficit by increasing revenues and reining in public spending. Such an approach could be coupled with pressure on China to reform its economy in ways that boost household spending and curb its savings glut, which has long contributed to global trade imbalances. Instead, Trump’s current policies risk triggering a trade war, derailing the global economic recovery, and reviving the destructive beggar-thy-neighbor policies of the 1930s…”
Tit for tat, pay more for that:
“…At the product level, perhaps the most pressing example of reciprocal tariff impact would be on American imports of European cars. The U.S. imposes 2.5% levies on vehicles like BMW, Mercedes-Benz and Volkswagen, a fraction of the 10% tariff imposed by the European Union on American auto imports. More broadly, how Trump handles value-added taxes (VATs) in the European Union, which are a sales tax-like measure running at an average of 21.6% across all goods, will determine how steep the tariffs look stateside. Trump’s deputy chief of staff Stephen Miller argues VATs should be incorporated into reciprocal tariffs, estimating the total tariff and VAT impact on American auto exports to the EU is about 30%, and it’s only ‘fair’ to in turn charge 30% on European exports to America.”