President Donald Trump and his team are out to reindustrialize America. Our steelworkers and auto workers, the president says, have “watched in anguish” as “foreign cheaters have ransacked our factories.” But they know the way out: a tariff-led war on the trade deficit.
It seems simple: If we make imports more expensive, people
will buy fewer of them. If imports decrease, the trade deficit shrinks. If we smelt
our own steel, build our own cars, and stitch our own track shoes, we make
America great again.
Unfortunately, this notion is as fantastical as Ron Vara, the character White House trade guru Peter Navarro represented in some of his books as a real China commentator. The connections among the many moving parts of the economy are such that pulling the tariff lever to cut imports is more likely to hinder reindustrialization than to help it. This commentary explains why, with special attention to the linkages among trade deficits, budget deficits, investment and saving.