As for the U.S. trade deficit, its expansion has provided an irresistible gotcha for the media to deride the Trump administration’s intent to shrink the gap, despite increasing the budget deficit. As RDQ Economics’ John Ryding and Conrad DeQuadros explain the accounting of the balance of trade, the only ways to shrink the deficit would be to boost domestic savings, cut investment, or reduce the budget shortfall. Tariffs, which are paid by U.S. consumers, would lower savings and might shrink the budget gap; that merely would transfer money from consumers to the government, and have no net impact on the trade gap.
Meanwhile, the strengthening of the dollar suggests global capital is coming to America, as the excess savings abroad are invested in the more vibrant U.S. economy.
In any case, Ryding and DeQuadros write that the fixation on trade balances was debunked by Adam Smith in 1776. “Trade policy is important to improve supply-chain efficiency and global economic growth,” they write. “A successful trade deal with China will be positive for growth, but may not reduce the deficit.” Securing intellectual-property rights and national security also are bigger priorities than bilateral deals, it also should be added.