June 19, 2018
- Almost no economist believes that tariffs benefit the global economy or any large subset thereof. Some specific members of an economy may profit, but free trade bolsters growth through increased commercial efficiency. Free trade as an advantage to all involved has been widely accepted economic theory since David Ricardo wrote about it in 1871.
- True free trade, in its purest sense, has rarely existed throughout history. Whether the industry is agriculture, automotive, technology or others, countries – and emerging markets in particular – have long maintained protective measures (tariffs, quotas, ownership restrictions) to protect domestic businesses from foreign competition.
- While tariffs are being put in place now, there is still hope that deals can be cut to avert lasting economic damage to all involved.
- The use of the “National Security” clause by President Trump should not be construed literally. It is a way the President can impose trade restrictions without Congressional support.
- The chart below, based on information from the Bureau of Economic Analysis and the Federal Reserve Board of Governors, shows that the United States has a two-decade long history of running a surplus with other countries for services (green line) but a deteriorating position when it comes to goods (blue line.)
- The chart also shows that there is a low correlation between the strength of the U.S. dollar (in orange) and trade balances. This is important because if there were no outside forces effecting trade, the relative strength of currency would more directly impact the flow of goods between countries.
The deleterious effects of a prolonged trade war would be felt far and wide with those benefiting few and far between. While everyone, in the end, loses in such a situation based on World Bank data, the U.S. economy may be in better shape than most to withstand a prolonged dispute. Based on “Trade as a percentage of GDP”, our domestic economy is one of the least dependent on trade in the world. This means that we would likely be able to continue business as usual longer than other economies.
 2016 World Bank Data. “Trade as a percent of GDP” calculated as (Imports + Exports)/GDP
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