Following on "Tariffs have a Laffer curve, too".
From Japan Economy Watch, March 28:
His Goal Is A Zero Trade Deficit
Source: Bureau of Economic Analysis https://tinyurl.com/46434kvn Note: See explanation below
Donald Trump and his acolytes may not be smoking something. But they are certainly living in a pipedream. In their fevered visions, America has eliminated its trade deficit, and this has doubled factory jobs. The real problem is that they’re forcing everyone else to live in the same dream. Their efforts to make their futile dream come true could cause a severe recession.
Trump’s goal is to double the number of factory jobs to 20% of all jobs, because this is the share in Germany. He thinks he can do this by bringing the trade deficit to zero. He imagines that, if America cuts its imports of cars, machinery, semiconductors, consumer goods, and so forth, then manufacturers will make these things in the US. In reality, even if the trade deficit disappeared, there is no way factory jobs will double. I’ll explain the reasons in the next post, but the short answer is that manufacturing already suffers a big shortage of skilled labor, including indispensable engineers. But first, let’s see why Trump cannot bring the trade deficit to zero without causing a very serious recession.
Trade Deficit Shrinks Most When US Growth Slows or Goes Into Recession
Trump believes that the bigger America’s trade deficit, the slower American growth, particularly manufacturing growth. Actually, the reverse is true. America’s trade deficit is highest when America is growing rapidly and is smallest when America is in recession. When the US is at full employment and growing well, its imports grow faster than its exports, causing the trade deficit to expand. Conversely, the deficit shrinks when the economy slows and unemployment rises. That’s because, when both consumer spending and business capital investment slow down, the country needs fewer imports, and they fall faster than exports.
A look at the data for the past 60 years proves the point (see chart at the top of this post.) Between 1965 and 2024. GDP grew fastest in the eight years when the trade deficit worsened by at least 0.5% of GDP, e.g., expanding from 2% of GDP to 2.5%. In those years, GDP growth averaged 4.5% per year. Of course, the worsening trade deficit did not cause the economy to grow faster. Rather, faster GDP growth led to more rapid import growth. The second fastest growth came in the 30 years when the trade deficit worsened between 0% and 0.5% of GDP. In those years, GDP growth averaged 2.9%. Conversely, the trade deficit shrank when GDP growth slowed. The deficit shrank between 0% and 0.5% of GDP when growth averaged only 2.2% per year. And the slowest growth was in the eight years when the trade deficit shrank by more than 0.5%: average GDP growth of just 1.5%.
Today, the trade deficit stands at 4.5% of GDP (see chart below)....
....MUCH MORE
He won't get the trade deficit to zero but we are already seeing foreign manufacturers coming to the U.S. to avoid tariffs.
Maybe $100 billion so far and a couple hundred billion to follow.
