Trump wants to cure trade imbalances via tariffs. It cannot possibly work…
Trump wants to cure trade imbalances via tariffs. It cannot possibly work.
Another Look at NAFTA
One of my readers proposed that problems US balance of trade issues started with NAFTA. Wrong!
Explaining Balance of Trade
Trump’s Mission Impossible
It is impossible for tariffs to fix problems caused by making the dollar the world’s reserve currency then removing the last constraints on global deficit spending!
If you support Trump’s tariffs as some sort of cure to trade imbalances, please read the above sentence over and over again until it finally sinks in that Trump is on a foolish path.
Historic Balance of Trade
From 1866 to 1968 the US generally had a trade surplus.
The US had huge trade surpluses during and just after WWI and WWII.
The productive output of Europe was destroyed. US production was not harmed in either war.
Although no US production was destroyed in the Korean War or the War in Vietnam, in both cases US production was diverted from productive uses to asinine uses, especially true for the Vietnam war.
Other nations were not stupid enough to get involved in a significant way, if at all.
Tut tut some may say. Harsh words indeed.
Their argument is that Nixon established trade relations with China in 1972.
OK let’s take a look.
US Imports from China did not soar until after China joined the WTO in 2001.
The US current account stared sinking well before NAFTA.
So, what is the cause?
No Enforcement Mechanism
Gold provided an enforcement mechanism against mercantilism, massive deficit spending, and huge government subsidies.
Starting August 15, 1971, when Nixon closed the gold window, there has been no enforcement mechanism.
That’s a problem that tariffs cannot possibly cure.
Why the Delayed Response to Nixon?
Nixon said it was “temporary”.
Guess what? It wasn’t.
Tariffs cannot possibly fix this issue.
Tariffs can only make matters worse by increasing costs on consumers and industries.
Trump is barking up the wrong tree, and loudly.