I know tariffs won’t meaningfully reduce trade deficit. For that matter, I also know that, for a savings short country, eliminating or reducing the trade deficit may not be the best thing for near-term growth. Furthermore, it is easy to see how tariffs reduce productivity growth and act as an indirect tax. It is also quite obvious that other countries are likely to respond to the Trump trade provocation.
In the paper, Will Trade Skirmishes End the Economic Cycle, we show that these policies have nothing to do with economics. Instead it is all about politics.
President Trump was elected with a specific agenda and to protect his base he is moving forward on that agenda. So, I have accepted the fact that while it may be bad economic policy, some form of tariffs on some goods for some countries are likely to be passed.
If you carry forward the political argument a bit further, it is also true that if the Trump Administration further intensifies the trade conflict, the real damage to the economy will be quite substantial. The same base that is cheering him on right now may not be so enthusiastic later when the consequences become clear. No one understands that more than Trump, in my judgment.
Further, while limited tariff policies make us uncomfortable, the impact on the longer term growth potential of the economy is modest at best. Further, the policies could prove themselves over time to be bad and eventually get unwound.
It will certainly create near-term issues with the markets. However, given the momentum in the global economy and the deficit financed stimulus to the US economy, my expectation would be that both growth markets will stabilize and likely move forward after a short hiatus, at worst.
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