- President Donald Trump identified the reduction of the US trade deficit as one of the key goals for the recent tariffs imposed by the US.
- According to research by economists at the New York Federal Reserve, however, it is unlikely that Trump’s tariffs will lead to a reduction of the trade deficit.
- The New York Fed economists identified two reasons that the deficit will not decline: increased costs will reduce the output of domestic exporters and retaliatory tariffs will reduce foreign appetite for US goods.
President Donald Trump’s tariffs are unlikely to help achieve one of the president’s biggest trade goals, according to a new study by the New York Federal Reserve.
But a new report from the New York Federal Reserve’s Liberty Street Economics blog shows that Trump is unlikely to get the targeted reduction using his favourite trade tool: tariffs.
According to the New York Fed economists, while the new duties on goods coming into the US will lead to a decrease in the amount of imports – as Trump intends – the value of exports sent out of the US will also come down.
“In this post, we argue that US exports will also fall, not only because of other countries’ retaliatory tariffs on US exports, but also because the costs for US firms producing goods for export will rise and make US exports less competitive on the world market,” the New York Fed said. “The end result is likely to be lower imports and lower exports, with little or no improvement in the trade deficit.”
To understand what happens to exports under higher tariffs, the New York Fed economists looked at a case where tariffs changed dramatically, but in the opposite direction. Between 2000 and 2006, the average Chinese tariff dropped by 40%, leading to increased productivity and trade.
Looking at the Chinese boost from dropping their tariffs, the economists were able to determine two reasons that a tariff increase would result in decreased exports:
- Domestic exporters produce less: Tariffs increase the cost for companies that import parts to use for final products, which in turn causes these firms to produce less. Many of these manufacturers are also exporters, so as the firms make less, they also export less.
- Retaliatory tariffs make US exports less attractive for foreign buyers: China, Canada, the European Union, and more have already hit many US goods with tariffs as a response to Trump’s restrictions. This makes US exports more expensive and less attractive to customers outside of the US. Already, foreign buyers of US goods like soybeans and boats have canceled contracts and gone elsewhere for their needs.
Put another way, even as Trump’s trade war slows down the rate of imports, the increased cost of goods because of the tariffs will cause exports to shrink as well.
Trade data since the start of Trump’s trade war backs up the New York Fed’s findings. According to the lastest data from the US Census Bureau, the US trade deficit increased through the first six months of 2018 and is growing faster than last year. In the month of June, exports actually fell while imports increased, the opposite of Trump’s goal.
While the trade war is still in its early days, based on the New York Fed’s research, the current trend is unlikely to change anytime soon.
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