Trump tariffs defy trade deficit 101

Donald Trump's understanding of international trade theory falls short of the idea of comparative advantage, which has been a cornerstone of economics for the better part of two centuries. The concept is simple: if it is cheaper for one country to produce shoes and another to produce socks, it makes sense for each to specialise in producing more of one rather than both. If both countries try to produce just the amount of shoes and socks they need themselves, they will do so at a higher cost than if they traded with each other. This is how trade increases the economic output of both nations - by producing more shoes and socks at the same or lower cost.

If a country tries to reverse this situation, it needs to impose an offsetting cost on imported goods to level the playing field for local manufacturers. This accomplishes two things. First, it brings more tax revenue to the government. Second, it creates more jobs at home. What it does not do is make the substitutes cheaper than the imports. Buyers face higher prices and reduce their purchases. With less being sold, fewer jobs are created, and the government forgoes tax revenue. This is why governments of all stripes tend to avoid import substitution. For a government like that of the US - which has championed, and benefited from, free trade since World War 2 - changing course is decidedly risky economic policy.

The argument that sways the Trump administration, apart from job losses in swing states, is persistent trade deficits. Here, too, its understanding of economics falls short. The US runs trade deficits because it overspends, not because other countries overproduce. The reason the US can live beyond its means is that its trading partners are willing to extend credit. If the US were to stop spending, this credit line would shrink, as would the government's ability to keep taxes low. That should be a sobering thought for politicians elected through donations from the country's wealthy voters on the premise that taxes will remain low.