Goldman Sachs' chief economist Jan Hatzius had an awkward of saying it, but what he's saying makes sense if you understand why we have a trade deficit to begin with.
Hatzius says drastically reducing our trade deficit with China through protectionism will cause a recession.
“For a deficit country such as the U.S., it is possible to scale up the trade restrictions sufficiently to achieve even an ambitious deficit reduction target. But this comes at a heavy cost in terms of weaker growth. Put simply, the only surefire way to reduce the deficit sharply under retaliation is a recession,” wrote Hatzius and his team in a Friday research note [...]
“For example, a 1% of GDP fiscal contraction improves the U.S. trade balance sharply after two years if demand does not weaken abroad and around half that if trading partners also pursue contractionary policies. But this improvement in the U.S. trade balance comes at a high price as real GDP falls by more than 1% as a result of the fiscal contraction,” according to Goldman’s economists.
Our trade deficit has soared over the past two years because the economy is healthy and Americans are buying more shit. If you take the cheap shit away the entire economy will contract because our largely service-based economy depends on the availability of cheap imports to function and maintain a standard of living that most people are accustomed to.
At the same time, attempting to cut our deficit by imposing tariffs on cheap imports also prompts our trading partners to retaliate by imposing their own tariffs on American exports. To use a technical term, it's a double-whammy.
If Trump goes through with everything his regime has proposed, we will see a recession. This won't remain a mystery for very long because the initial list of over 1,300 products Trump wants to impose tariffs on should be finalized this summer unless the decision is canceled or postponed.