Let's get something straight before we dive in here. Tariffs can be very bad for consumers, and still be "good" overall for the U.S. economy.
That, in fact, is the whole point economist Michael Pettis, a China expert and a Carnegie fellow, is trying to make in a series of posts on X this weekend. Pettis warns against using the 1930 Smoot Hawley tariffs--which were disastrous for the U.S. during the Great Depression--as too much of a precedent for what might happen under Trump's next presidential term.
The whole reason boils down to one essential fact: back then, we were running trade surpluses. Tariffs, which weaken domestic demand while boosting savings, therefore made the downturn worse. That was the opposite prescription of what a weak economy needed. But today, we are running trade deficits--and have been for fifty years.
What does an economy running trade deficits need? Remember, the trade deficits themselves mean we import more than we export, so we are literally consuming more than we produce. (Another way to put this is that our savings are not large enough to fund our investment needs.)
Therefore, tariffs could actually help rebalance a trade deficit economy, for the same reason as stated earlier: they weaken domestic demand while boosting savings--which funds investment. If the U.S. is trying to boost domestic production, in other words, this would be one way to do it.
There is an additional benefit, as well: a lighter import bill, which could help shrink the fiscal deficit that has been contributing to our large national debt. We are currently paying $1 trillion a quarter for imports, while receiving less than $800 billion for our exports.
Okay. I expect this to generate a lot of controversy and discussion in the months ahead. But up until now, the tariffs question hasn't found a very receptive audience in the economics community. The fact that President Biden left in place many of the Trump tariffs could now spur more discussion about their possible merits.
Let's not pretend this wouldn't hurt consumers, though, as well as U.S. industries that depend on cheap imports. Even if voters want a future with more domestic production (and jobs), the transition could be painful. Little surprise Trump advisers like Scott Bessent--who could reportedly become Treasury Secretary--told CNBC the implementation of tariffs might in reality be somewhat more gradual than what we heard on the campaign trail.
And finally, China may not have much ability to respond in kind. Hiking tariffs on the U.S. could undermine their recent stimulus actions and any hope of spurring meaningful growth. That's because China today is like the U.S. a century ago; it runs trade surpluses. It has weak domestic demand, and excessive savings. Ratcheting up tariffs on other countries will only exacerbate that, as Pettis points out.
Have a great night, and see you tomorrow!
Kelly