President Trump is tariff happy. The incentive for his trade war is an American trade deficit, a deficit that he believes to be the result of foreigners utilizing United States through “dishonest” trade practices.
Trump, like most businessmen, thinks the deficit is bad. When the job starts a consistent budget deficit, it must collect more capital to finance these deficits or bankruptcy entry. But what is true of running a job is not necessarily the truth for the management of the country. Indeed, Trump’s thinking represents a classic misconception of the composition – the belief that what is true of the part (job) is true for the whole (economy).
Trump is not right in two points. The American trade deficit is not caused by foreigners – it is domestic, made in the good old US, it is also not inherently bad; In fact, for Americans it is a privilege. Both of these mistakes stem from Trump’s unconsciousness in close relationships between savings, investment and trade balance of the Earth.
The country’s balance is always accompanied by an appropriate gap between domestic savings and domestic investment. If domestic savings are greater than domestic investments, such as China, Switzerland and Germany, a trade surplus will be registered. Also, if the country saves less than invested, such as the United States, it will register a trade deficit. The negative trade balance of the United States, which the country has registered every year since 1975, “was made in the US”, the result of the investment that was in front of home savings. In order to look at trade balance properly, the focus should be on the conditions of investment in the domestic economy, not the nasty sides of the actors.
What follows from investments The identity is that the country can only launch a trade deficit to the extent that it is able to finance excess investment with the rest of the savings in the world. For many countries, permanent trade deficit is worrying because the inflow of external savings are precise. Larger interest rates are required to retain external finances, which can slow growth and lead to the depreciation of the currency. If the ability of the country is funded by its deficit brought into question, the sudden stopping of capital inflows can even stimulate a currency crisis. The opposite was the case for the United States for almost five decades. Foreigners are not only happy to finance our trade deficits. They are so much eager for the accumulation of the United States requests to have an external financial inflow of lower American interest rates and strengthen the US dollar. Thanks to the ability of the US government and the US financial system to attract and retain external finances, Americans can consume more than they produce. Furthermore, they now enjoy strong investment and economic growth despite low domestic savings.
Why do foreign investors afford Americans this privilege? The simple answer is that, for many reasons, the United States is the best place in the world to be invested. The US dollar is a world -old currency – investors trust that. The US also have strong property rights, robust legal and banking institutions, a lot of talented human capital and the largest and most liquid capital markets in the world.
The assumption based on Trump’s tariff program is simply untrue. In fact, the reality turns Trump’s assumption on the head. For Americans, deficits are good, they are not bad. Furthermore, the deficit is not caused by foreigners who eat our lunch. The United States created their trade deficit by making themselves a leading destination for world savings. That is why Nobel Product Milton Friedman concluded that: “One of the things that confuse me is to what extent people consider the trade deficit bad.” And we were confused.
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This story is originally shown on Fortune.com
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