Translated by: Block unicorn

I don't actually think you can beat Trump's tariffs by debating rationally or explaining economic theory. I mean, how do you argue with something like this?

I have accepted the idea that Americans can only generally realize that widespread tariffs are bad by experiencing the negative consequences of widespread tariffs in person—that is, touching the so-called hot stove. Fortunately, I think Americans might wake up quickly:

But anyway, this is an economics blog, so even though I don't expect much reward this will bring, I think I should explain why the trade deficit won't make one poor (although that doesn't mean they're OK).

Trump, his advisers and entourage, believes that the trade deficit means that the United States is “blacklisted” by foreign countries. As I explained in yesterday’s post, that’s why Trump sets tariffs at levels he believes can eliminate the U.S. trade deficit with every trade deficit.

Trump’s view on the trade deficit is based on two basic misunderstandings. The first is a simple accounting error. Trump's advisers looked at the formula for gross product (GDP) and noticed that imports were subtracted from GDP. They don't understand that this is because imports are also added to consumption and investment, so they must be subtracted in the end to remove them from the numbers. The truth is that imports have no effect on GDP.

Trump's second misunderstanding is based on the idea that imports will be replaced by production 1 to 1 - that is, if you prevent the United States from importing a washing machine, a U.S. company will produce one more washing machine. This is certainly a possible outcome, but not the only outcome. American consumers may just use one washing machine less, which will make everyone poor.

In fact, Trump and his team may not even realize that these are two different misunderstandings. They may think that their false beliefs about accounting (i.e., imports reduce GDP) are naturally derived from their false beliefs about import substitution. These two errors reinforce each other.

Anyway, because Trump misunderstood the trade deficit in both ways, he believes that when the United States has a trade deficit with someone, that is blackmailing them. Did the target person extort you? No. Ask about whether the trade deficit is good or bad with a credit card from a case where the trade deficit may be beneficial, just like asking whether it is good or bad with borrowed money. The answer is obviously "depending on whether the purchase is worth it."

The one thing to remember is that not all purchases are for consumption—a lot is actually productive investment. If a U.S. factory buys a CNC machine tool from Japan for $100,000 and Japanese tool manufacturers just deposit that money into U.S. Treasury bonds, this will increase the U.S. trade deficit. But if thisA U.S. factory uses this tool to make and sell $500,000 worth of auto parts, and it makes money—and so does the U.S.

This is what South Korea does when it is rapidly industrializing. Around the 1980s and early 1990s, South Korea experienced a trade deficit:

This period, South Korea was making huge investments in the industrial economy:

By the way, in the late 1970s and early 1980s, South Korea was also increasing its exports—not only in US dollars, but also as a percentage of its GDP:

Remember that exports increase GDP, and imports do not subtract from GDP. Therefore, even if South Korea has a huge trade deficit, trade will then at that time of year they will have a trade deficit with the United States. In this case, it is basically the United States borrowing money from Canada and then repaying it.

It's like you use a credit card to buy a washing machine from your target, then earn your salary after working, and then pay off your credit card with your salary. Is this a bad thing or a good thing? Depend on the situation. Maybe you can wait until you have cash in the bank before buying a washing machine. Or maybe it's worth buying a washing machine now instead of waiting for a few months, even if you have to pay a little interest on your credit card debt.

Purchasing consumer goods with debt can be a good financial decision or a bad financial decision. This is basically what the United States does when it has a trade deficit with others.

It is also worth mentioning that, like credit card borrowers, the United States may never fully repay its foreign loans. If the United States experiences unexpectedly high inflation, and Canadian holdings of U.S. bonds will depreciate. It's basically like part of the debt default. Or, if one day an irresponsible U.S. leader appears and defaults, and Canada will see part of their Treasury value go away.

So, when the United States has a trade deficit with others, those are actually taking risks. They basically gave us a credit card that we could use to buy what they made. Yet there is always the possibility that we may declare bankruptcy and never pay back the money.

So it can be said that in a sense, those with trade deficits pay more attention to short-term or are more impatient than those with trade surpluses. There is no motivation or personality like a person, but it is not too bad to think about it.

The last question here is whether importing things from other things will lead to a decrease in the United States. Maybe if you bought some tomatoes with a credit card, you will plant fewer tomatoes in your garden. Then when it comes to paying off your credit card debt, you may have forgotten how to grow tomatoes. This basically means deindustrialization.

Obviously, in some cases, the trade deficit does not lead to deindustrialization. For example, in the South Korean case in the 1980s and 1990s, we saw that the trade deficit helped the country industrialize and boost manufacturing. Something like that may have happened in the United States in the 1990s.

But OK, we're not talking about those historical cases, are we? We are talking about the trade deficit that has emerged in the United States over the past 25 years, mainly with , but also with many others. These trade deficits are mainly due to the U.S. borrowing money to consume rather than investment. The question is whether these deficits have caused the United States to lose its manufacturing industry.

The answer, at least for , is "yes". Import competition by Autor et al. (2013) has resulted in a large shift of jobs from manufacturing to services in the West Coast and large cities, but in the Midwest, this has mainly caused a drop in wages and net losses of 2 million to 2.4 million. [The point is that I added]

You can roughly see this by looking at the original data. Until 2001, when she joined the WTO and began exporting large quantities of cheap goods to the United States, U.S. manufacturing employment remained fairly well for years (although a percentage of the total was declining). In the 21st century – a decade of surge in imports – it was like falling off a cliff:

It is worth noting that the trade deficit itself contributes to these losses of employment. Even if the U.S. trade is balanced, import competition may cost some American manufacturing workers jobs because A) some U.S. exports may be services rather than finished products, and B) the U.S. may export more capital-intensive goods, thus stopping the labor-intensive products that were good at producing in the 2000s.

But indeed, the U.S. trade deficit with China is huge and has led to a severe recession in industrialization. The continued trade deficit with China may hinder the reindustrialization of the United States, on the one hand, because of import competition and on the other hand, because of squeezed American companies out of the export market.

So, if you think the importance of manufacturing exceeds its contribution to GDP (like me), then the trade deficit with _ could be an important issue to be addressed.

But that doesn't mean Trump's tariffs are the right way to solve it! Dismissal, and why indicators of manufacturing activity and confidence are falling. Second, Trump’s tariffs will ultimately reduce U.S. exports, not just imports, both through exchange rate changes and other retaliation. This will damage U.S. manufacturing.

Afterwards, what is important for the United States is not to reduce imports—but to increase exports. Trump's tariffs will only hurt that goal.