Currency and trade deficit
President Trump hates the US trade deficit, and he has made eliminating or reducing large bilateral trade deficits the centerpiece of his trade policies. He thinks that deficits mean the United States is "losing" in global markets because it is buying more goods and services from overseas than it is selling to foreign markets.
This interpretation is misguidedbut there are reasons to be concerned about the aggregate currency and trade deficit deficit. The main worry is that sustained deficits over an extended period will rack up debt that eventually must be repaid. The United States runs a trade deficit, not because of bad trade deals, but because its citizens spend more than they earn and finance the difference with foreign credit. Since the deficit is about production and consumption, the tools that will be most effective in reducing it are those that impact how much US citizens, businesses, and governments save.
If the administration is serious about reducing the trade deficit, there are ways to do it. Trade policy, however, is not on the list. Although it seems intuitive that trade policy should be the appropriate instrument for a trade deficit—just as currency and trade deficit policy is the right tool for a fiscal deficit—the economics do not work that way.
Higher tariffs on one country or product divert trade to other countries or products, distorting consumption but leaving the trade balance roughly unchanged. Higher tariffs on all countries will reduce imports, currency and trade deficit they will also reduce exports, again leaving the trade balance roughly unchanged.
The reason best savings options for college that import tariffs reduce the demand for foreign currency and the dollar strengthens, thus the tariffs reduce both imports and exports and distort consumption and production.
Overall, higher tariffs can be expected to reduce trade and income, but with a negligible impact on the trade deficit. Follow CarolineFreund on Twitter.
The reason is that import tariffs reduce the demand for foreign currency and the currency and trade deficit strengthens. Can you cite any examples currency and trade deficit the US took action to reduce its trade deficit and that led to the dollar strengthening? Otherwise this seems like one of those propositions that exist in theory but not in the real world. Exchange rates are notoriously hard to predict and move in response to many factors, so it is difficult to find a clean example.
In addition, sharp tariff changes are rare and tend to be driven by forces that also affect the currency and trade deficit rate. One potential example is Chile in the early s. The simple average tariff fell from 10 percent to less than currency and trade deficit percent.
Theory suggests that increased demand for imports in Chile should have led to greater demand for foreign currency and a real exchange rate depreciation. Indeed, the real exchange rate depreciated by 9 percent, and the current account balance actually improved somewhat. There is stronger evidence found in cross-country data. If tariffs lead to few imports without affecting exports, the correlation between tariffs and the trade balance should be positive. In fact, if anything, the reverse is true: According to the textbook, the Balance of Trade equation of goods and currency and trade deficit is defined as Exports minus Imports X-M.
And the other question, is related with the third way to reduce the trade deficit: November 6, Three ways to reduce the trade deficit are: Consume less and save more. If US households or the government reduce consumption businesses save more than they spendimports will drop and less borrowing from abroad will be needed to pay for consumption. This means that consumption taxes—like those that nearly all other countries in the world have—could help reduce the deficit, by discouraging consumption, increasing saving, and reducing the government deficit.
In contrast, an unfunded tax cut, such as the one proposed by the administration, will expand the deficit because the government will be consuming more currency and trade deficit to its earnings. Depreciate the exchange rate. Trade deficit reversals are typically driven by a significant real exchange rate depreciation.
A weaker dollar makes imports more expensive and exports cheaper and improves the trade balance. Given the dollar is the world's reserve currency, and still regarded as the safest for investors, it tends to run stronger than other currencies. But when foreign governments actively push the dollar up to maintain their surpluses, the United States currency and trade deficit counteract intervention by selling dollars and buying foreign currencies.
The administration could also encourage the adoption of other major currencies, such as the euro, yen, or renminbi, as alternative reserve currencies. A weaker dollar would be good for the US economy, but relinquishing the role as the dominant currency would reduce the power of the United States in global markets and the seigniorage profit earned.
One of the reasons that the United States runs a trade deficit is because borrowing from abroad is cheap and easy. If it were more expensive, US citizens and the government would borrow less. A tax on non—foreign direct investment capital inflows that rises with the size of the inflow could reduce excessive borrowing for consumption and help close the government imbalance. While some worry that capital controls could currency and trade deficit asset prices and reduce investment, they could also curb excessive speculative investment, such as happened before the financial crisis.
Jeff Ferry November 9, Hi Caroline, You claim that: Caroline Freund November 9, 3: Gabriel Arrieta December 14, 7: Thank you very much for the consideration, Dr. Leave this field blank. More from Caroline Freund. More on This Topic Op-Eds.