The trade deficit will soon head in the direction Trump wants, just not the way he wants.
A recession tends to reduce the trade deficit.
This was especially true in the Great Recession when the balance of trade improved from -66.99 billion to -25.84 billion between July 2008 and May 2009 (monthly numbers)
Similarly, the goods deficit improved from -77.63 billion to -35.60 billion.
My base case is recession, so we are on track for at least some improvement.
What About Tariff Collection?
Good question. If we import less, we will collect less than what Trump wants in tariffs.
And if the US is in recession, the rest of the world is sure to be suffering too. That means we will have fewer exports as well.
If You Want Less of Something, Tax It
A fundamental economic rule is if you subsidize something you get more of it and if you tax something you get less of it.
Tariffs are a tax on trade. So we will not only have less trade due to taxes (factor in retaliations), we will have less trade due to recession.
This applies to imports and exports.
Lutnick Says Tariffs Can Eliminate the IRS and Balance the Budget
On March 12, I commented Lutnick Says Tariffs Can Eliminate the IRS and Balance the Budget
We have an annual trade deficit of $918 billion.
Team Trump proposes $918 billion in “reciprocal tariffs” to make the trade deficit go away.
But to balance the budget and eliminate personal income taxes, Trump would need to collect $7 trillion in tariffs on a net trade deficit of $918 billion.
I would love to hear a detailed explanation of exactly how that works.
Are you ready for that miracle? Me too. But wait, there are still more benefits to this amazing deal.
Trumps Claims
- Tariffs will increase revenue enough to balance the budget
- Tariffs will bring manufacturing back to the US
- Tariffs will reduce inflation
- Tariffs will increase exports
Conflicting Economic Madness
Points 1 and 2 conflict. Tariffs cannot simultaneously bring back manufacturing and raise enough revenue to balance the budget.
Points 2 and 3 conflict. Since the US is one of the world’s highest cost producer of goods thanks to unions, tariffs will not reduce inflation.
Points 2 and 4 conflict. Since the US is one of the world’s highest cost producer of goods, and other countries will retaliate, tariffs will not increase exports.
No one yet can fully explain Trump’s economic plan because it’s all double- or triple- counting of contradictory ideas.
I do expect Trump to reduce the trade deficit from this starting point. But the more he succeeds, the lower the tariff revenue and the bigger the recession.