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Thread: Why President Trump's Tax Cuts Are Making The U.S. Trade Deficit Bigger

  1. #1

    Why President Trump's Tax Cuts Are Making The U.S. Trade Deficit Bigger

    https://www.forbes.com/sites/frances.../#47d9c32a48e3

    President Trump is on a mission. He has been reliably informed by economic advisers such as Peter Navarro that putting pressure on countries such as China and Germany to reduce their bilateral trade surpluses with the U.S. will close the U.S.’s large and growing trade deficit with the rest of the world. So he is using trade tariffs as a weapon in a growing “war” with the U.S.’s principal trade partners. “Trade wars are easy to win,” he says.

    So far, President Trump has introduced tariffs on goods imports from the EU, Canada, Mexico and China. All of these countries have retaliated with tariffs of their own, and the EU has lodged a dispute at the World Trade Organisation regarding the tariffs on steel and aluminium. President Trump has just announced tariffs on a further $200bn of Chinese imported goods, and has rejected an offer from the EU to cut tariffs on automobile imports to zero if the U.S. does likewise. Battle is most definitely joined, and President Trump clearly thinks he will win. The U.S. trade deficit should be on its way out.

    But instead, the trade deficit is growing. The Commerce Bureau’s Advance Economic Indicators bulletin for July 2018 shows that the deficit in trade in goods has risen to $72.2 bn. Exports have fallen by $2.5bn since June, to $140bn, while imports have risen to $212.2 bn, $1.8bn more than in June. Admittedly, it is early days in the trade war, but this does not look promising. Why is the U.S. trade deficit rising, instead of falling in response to the tariff salvo?

    Part of the reason is Federal Reserve interest rate policy. Higher interest rates attract inflows of foreign capital to the U.S. Since the capital account is the inverse of the current account, this necessarily widens the current account deficit, of which the trade deficit is a significant component. Additionally, the U.S. dollar has been on a tear all year, driven up by rising interest rates. This makes American exports more expensive relative to competitors in the rest of the world, and encourages imports. Thus, Fed monetary policy is helping to widen the U.S.’s trade deficit.

    But part of the blame for the widening trade deficit also lies at President Trump’s door. The tax cuts have failed to “pay for themselves” and are driving up the U.S. fiscal deficit to its highest level since the Great Recession. Additional money in the pockets of Americans tends to into consumption spending rather than saving: some of that spending is inevitably on foreign goods. Also, many of the additional bonds the U.S. Treasury is issuing because of the rising deficit are being bought by foreign investors, thus increasing foreign capital flows into the U.S. and therefore - as a matter of arithmetic - widening the current account deficit.

    Furthermore, the U.S. economy is thought to be close to full capacity. Wage growth remains subdued, but unemployment is very low and the participation rate is rising. The Congressional Budget Office says that the tax cuts will temporarily increase GDP growth above the U.S. economy’s productive capacity.

    If the economy really is close to capacity, then production won't increase enough to mop up all the additional spending arising from the tax cuts. Spending will therefore go into imports, thus widening the trade deficit. Inflation is likely to rise too, making the prices of foreign goods more attractive than those of U.S.-produced goods; this loss of competitiveness again tends to widen the trade deficit.
    More at link.
    Donald Trump: 'What you're seeing and what you're reading is not what's happening'

    "Truth isn't truth"- Rudy Giuliani

    "China has total respect for Donald Trump and for Donald Trump's very, very large brain," - Donald Trump.

    I am Zippy and I approve of this post. But you don't have to.



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  3. #2
    ^^^^^^^^^^^^^^^^^^^^this^^^^^^^^^^^^^^^^^^^^




    .................................................. .high tariffs balloon trade decifits

  4. #3
    Quote Originally Posted by Aratus View Post
    ^^^^^^^^^^^^^^^^^^^^this^^^^^^^^^^^^^^^^^^^^




    .................................................. .high tariffs balloon trade decifits
    The tariff effect will be on top of the income effect.

    https://www.reuters.com/article/us-u...-idUSKCN1LL1ME

    U.S. trade deficit surges to five-month high as exports fall

    The U.S. trade deficit rose to a five-month high in July, with the politically sensitive gap with China hitting a record high.

    The administration’s protectionist trade policy has left the United States embroiled in tit-for-tat tariffs with the European Union, Canada and Mexico as well as an escalating trade war with China. President Donald Trump claims the United States is being taken advantage of by its trade partners.

    The deterioration in the trade deficit reported by the Commerce Department on Wednesday came a day before the end of a public comment period on a list of $200 billion worth of Chinese goods widely expected to be hit with tariffs soon.

    “America still isn’t getting a fair deal on trade and that can only mean one thing,” said Chris Rupkey, chief economist at MUFG in New York. “President Trump is going unleash another $200 billion in tariffs on China imports.”

    The Commerce Department said the trade deficit increased 9.5 percent to $50.1 billion as exports of soybeans and civilian aircraft dropped and imports hit a record high. The trade gap has now widened for two straight months.

    Economists polled by Reuters had forecast the trade shortfall swelling to $50.3 billion in July.

    The government imposed import duties on goods including steel, aluminum, washing machines and solar panels early this year to protect American industries from what Trump says is unfair foreign competition. In addition, the United States and China have slapped retaliatory tariffs on a combined $100 billion of products since early July.

    Washington is also seeking to revamp the North American Free Trade Agreement. The United States struck a deal with Mexico last week, but negotiations with Canada have been contentious.

    The administration says eliminating the trade deficit will put the economy on a sustainable path of faster growth. But economists say some of the government’s policies such as a $1.5 trillion tax cut package early this year will worsen the trade deficit. The fiscal stimulus has boosted consumer and business spending, drawing in more imports.
    Donald Trump: 'What you're seeing and what you're reading is not what's happening'

    "Truth isn't truth"- Rudy Giuliani

    "China has total respect for Donald Trump and for Donald Trump's very, very large brain," - Donald Trump.

    I am Zippy and I approve of this post. But you don't have to.

  5. #4
    Quote Originally Posted by Aratus View Post
    ^^^^^^^^^^^^^^^^^^^^this^^^^^^^^^^^^^^^^^^^^




    .................................................. .high tariffs balloon trade decifits
    Never attempt to teach a pig to sing; it wastes your time and annoys the pig.

    Robert Heinlein

    Give a man an inch and right away he thinks he's a ruler

    Groucho Marx

    I love mankind…it’s people I can’t stand.

    Linus, from the Peanuts comic

    You cannot have liberty without morality and morality without faith

    Alexis de Torqueville

    Those who fail to learn from the past are condemned to repeat it.
    Those who learn from the past are condemned to watch everybody else repeat it

    A Zero Hedge comment

  6. #5
    The tax cuts are good, if they happen to increase the trade deficit temporarily that doesn't matter.
    Mostly the strong dollar/weakness in foreign currencies is increasing the deficit.
    The tariffs/improved trade deals will bring manufacturing back to the US and reduce the deficit eventually.
    Never attempt to teach a pig to sing; it wastes your time and annoys the pig.

    Robert Heinlein

    Give a man an inch and right away he thinks he's a ruler

    Groucho Marx

    I love mankind…it’s people I can’t stand.

    Linus, from the Peanuts comic

    You cannot have liberty without morality and morality without faith

    Alexis de Torqueville

    Those who fail to learn from the past are condemned to repeat it.
    Those who learn from the past are condemned to watch everybody else repeat it

    A Zero Hedge comment

  7. #6
    Quote Originally Posted by Swordsmyth View Post
    The tax cuts are good
    Whether the massive and increasing burden of the federal government is financed by taxes, borrowing, or inflation matters little.

    Quote Originally Posted by Swordsmyth View Post
    The tax cuts are good [for electioneering purposes]
    That's true, since the voters don't see the unseen effects of increased borrowing (e.g. higher interest rates).

    ...well, they do, but (like higher good and service prices resulting from inflation) they don't blame the culprits.
    Last edited by r3volution 3.0; 09-09-2018 at 08:01 PM.

  8. #7
    Quote Originally Posted by r3volution 3.0 View Post
    Whether the massive and increasing burden of the federal government is financed by taxes, borrowing, or inflation matters little.
    Economically it is actually best if they are financed by inflation but that is seductive and can snowball, borrowing is almost as advantageous but you can have problems when you run out of creditors, taxes are death on wheels, we must cut the spending but whether we do or not the tax cuts are good.
    Never attempt to teach a pig to sing; it wastes your time and annoys the pig.

    Robert Heinlein

    Give a man an inch and right away he thinks he's a ruler

    Groucho Marx

    I love mankind…it’s people I can’t stand.

    Linus, from the Peanuts comic

    You cannot have liberty without morality and morality without faith

    Alexis de Torqueville

    Those who fail to learn from the past are condemned to repeat it.
    Those who learn from the past are condemned to watch everybody else repeat it

    A Zero Hedge comment

  9. #8
    Quote Originally Posted by Swordsmyth View Post
    Economically it is actually best if they are financed by inflation but that is seductive and can snowball, borrowing is almost as advantageous but you can have problems when you run out of creditors, taxes are death on wheels, we must cut the spending but whether we do or not the tax cuts are good.
    In all cases, the exact same quantity of resources is consumed by the state and therefore unavailable for productive use.



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  11. #9
    Quote Originally Posted by r3volution 3.0 View Post
    In all cases, the exact same quantity of resources is consumed by the state and therefore unavailable for productive use.
    But taxes do the most collateral damage.
    Never attempt to teach a pig to sing; it wastes your time and annoys the pig.

    Robert Heinlein

    Give a man an inch and right away he thinks he's a ruler

    Groucho Marx

    I love mankind…it’s people I can’t stand.

    Linus, from the Peanuts comic

    You cannot have liberty without morality and morality without faith

    Alexis de Torqueville

    Those who fail to learn from the past are condemned to repeat it.
    Those who learn from the past are condemned to watch everybody else repeat it

    A Zero Hedge comment

  12. #10
    Quote Originally Posted by Swordsmyth View Post
    But taxes do the most collateral damage.
    Inflation also causes collateral damage, of course.

    Apart from causing entrepreneurial errors (see: the business cycle), it encourages consumption at the expense of savings.

    Borrowing, meanwhile, which is the alternate financing method in question, only defers the issue, at interest.

    All borrowed money must ultimately be repaid through taxation or inflation.

    Retard would have done better to simplify the tax code, to reduce compliance costs, while cutting spending.

    Course, pigs would also do better to not wallow in $#@!; but they're pigs.
    Last edited by r3volution 3.0; 09-09-2018 at 08:16 PM.



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