IMF: Higher Tariffs Won’t Reduce Trade Deficit

Written by SK Ashby

If Trump ever follows through on his threat to escalate his trade war with China by increasing tariffs from 10 to 25 percent, that will do damage to both economies but it will do little if anything to reverse our trade deficit according to the International Monetary Fund.

A new study from the International Monetary Fund (IMF) found that escalating Trump's trade war will kill jobs and cut economic growth in both countries, but our trade deficit would remain static as imports from other countries increase to compensate.

Any attempts to address a trade deficit or surplus with another country through tariffs would shift the trade balances with other countries, making no impact on a country’s aggregate balance, the IMF said.

For example, U.S. imports of electronics and machinery from China would drop to 11.5 percent after the tariffs from about 22.1 percent of total imports, while the proportion of imports from other countries would rise.

The share of imports from East Asian nations would climb to 17.7 percent from 15.6 percent, Mexico’s share would rise to 14.6 percent from 12.6 percent, and Canada’s would increase to 12.3 percent from 10.8 percent, according to the report.

More importantly, the IMF study found that escalating Trump's trade war as he has threatened to do would shave up to 0.6 percent off GDP. And that may not sound like a lot, but it is. Such a significant dip in growth would push us closer to recession territory.

Once you understand that our trade deficit is driven by the demands of American consumers, not foreign governments (Trump doesn't understand this), everything becomes more clear. Our overall trade deficit would remain static because Americans will still have an appetite to buy things that we don't or can't produce.

For some of the same reasons why Trump closing the border would lead to avocados disappearing from your local grocery, we will always have a trade deficit.