America's massive trade deficit: Why BIG tariffs won't hurt the United States

[HiPointDem]

55. a strong dollar AND tariffs? doesn't compute.

There are few areas of economics more boring than accounting identities. This is really unfortunate, since it is virtually impossible to have a clear understanding of economic policy without a solid knowledge of the underlying identities.

The debate over the value of the dollar against the Chinese yuan is the latest episode in this silliness. The Washington tribal elite has been on the warpath against budget deficits in recent months. They have worked themselves into such a frenzy that nothing will stand in their way: neither concerns about unemployment, nor concerns about the well being of our elderly, nor even concerns about basic economic logic.

The central problem stems from the simple accounting identity that national savings is equal to the broadly measured trade surplus. A country with a large trade surplus will also have large national savings. Conversely, a country with a large trade deficit will have negative national savings. These relationships are accounting identities – there is no way around them.

This brings us to the next part of the story; where trade deficits come from. At a given level of GDP, the main determinant of the trade deficit is the value of the dollar in international currency markets. This is very basic supply and demand. If the dollar is higher in value relative to other currencies, then our exports will cost more to people living in Germany, Japan, and China.

If a car sells for $20,000 in the United States, then the price of this car to people living in other countries will depend on how much of their own currency (euros, yen or yuan) they must pay to get a dollar. The higher the dollar relative to these other currencies, the more expensive the car is to foreigners. And, the more expensive it is to foreigners, the fewer US-made cars they will buy. This means our exports will fall.

The story works in reverse on the import side. If the dollar is high and therefore buys lots of foreign currency, then imports are cheap. This means that we will buy lots of imports.

If we have low exports and high imports, then we will have a large trade deficit. End of story. We can train our workers to be more productive, urge our firms to invest more and try to improve our public infrastructure, but realistically, none of these factors can come close to offsetting the impact of a currency that is 20-40% over-valued. A severely over-valued currency virtually guarantees a trade deficit.

http://www.guardian.co.uk/commentisfree/cifamerica/2010/oct/06/economy-economics


A weak currency and tariffs is the historically successful path to development. The US used it, Japan used it, & I believe England used it (not so sure on that).

As countries become more technologically developed & efficient in manufactures, their currencies appreciate. That is the point at which historically, they start pumping for 'free trade'.

What are the ramifications of having both a strong currency (meaning you can buy assets listed in weaker currencies more cheaply) AND high tariff barriers (which means those same weaker currencies can't sell you their products)?

They appear to be kind of noxious, imo. High tariffs in the strong currency countries would mean impoverishment of the weak tariff countries and retalitory tariffs + war (as i'd expect the us to go to war to maintain access to resources).