What about the flip side - U.S. exports? In the event of broad-based devaluations of other currencies, or devaluations from a major trading partner like China, won't our exports become more expensive in those other countries, leading to a decline in U.S. income from exports? Asking for a state (Oregon) this is highly export dependent.
This from Oregon's state economist in his new revenue forecast:
"...(t)he State of Oregon may be particularly vulnerable to economic crosswinds in the next presidential term. Trade policy is likely to be specifically oriented toward Pacific trading partners (impacting western states to larger degree); and it is poised to be particularly focused on the semi-conductor/tech sectors, which are vital pillars of Oregon economic activity. Meanwhile, based on recent history, retaliatory measures from major US trading partners have been particularly punitive toward domestic agriculture, timber and manufacturing—all of which are core industries of the state, as well. As trade tensions increased in 2017-18, Oregon statistics on production and unemployment both deteriorated relative to national trends."
I've always been convinced that the issue is that Trump hears "$800 billion deficit" and thinks the US is in some real sense losing that much money, like a company's P&L.
It all boils down to the success of the US financial sector. That leads to persistent financial account surpluses, thus persistent current account deficits.
Don't worry. Trump will force his GOP Congress to transfer control of the Fed to the Executive Branch, and bludgeon it into cutting the Prime. Or just simply bully the Fed with that threat. The Prime will be slashed, the economy juiced. But inflation and consumer pricing will then surge--turbocharged by tariffs on building material (and other) supply chains.
The GOP will get creamed in the '26 midterms by voters enraged over soaring consumer pricing; including many of those who just voted to punish Harris for the inflation that happened during Biden-Harris.
Xi will move on Taiwan in '27, and if Trump guts CHIPS & the IRA--as he's said he will--China will kick our ass when we quickly deplete our stocks of smart munitions and drones.
I cannot fathom why anyone cares about reducing the US trade deficit. If the US imports more than it exports, what that means in practice is that the US is getting lots of useful goods, while foreigners are getting lots of pieces of paper with dead guys printed on them. Why is this an issue?
I think what people don't understand is that America and China don't actually import or export anything. People just buy stuff from each other. Some of those people live in the USA, some live in China, but that isn't really economically relevant. In certain special cases where goods have defense value, like batteries, what country the buyer and manufacturer are located in might be important. But most of the time it doesn't matter.
<If the US imports more than it exports, what that means in practice is that the US is getting lots of useful goods, while foreigners are getting lots of pieces of paper with dead guys printed on them.>
First off, consumption may be the ultimate end in economics, but in national defense it's production that takes the cake. Offshoring your entire industrial capacity, especially for critical components like semiconductors, is essentially living off of tomorrow today. I'm not much of a China hawk (or a liberal internationalist), but even I can recognize that importing Chinese-made components for modern weapons systems is a bad idea in the long run.
Second, if the U.S. gets essentially free stuff for bits of paper, then the economic benefits of having the dollar as the reserve currency have been massively understated by economists. Moreover, if and when the dollar stops being the global reserve currency, the U.S. is going to need to have industrial capacity, if only to gain hard currency to finance imports (like we did under the gold standard). I know Noah's still bullish on the dollar, but then again people said the sun never set on the British Empire, until it eventually did.
Third, Noah's probably going to disagree with this, but a 100% consumer society that doesn't produce anything material doesn't exactly strike me (or most people, including a lot of working-class MAGA voters) as an attractive end goal for liberalism. People need to feel useful, and for some reason or another industrial jobs are better at giving them meaning than most other jobs (at least for working-class types). You might say that's economic nonsense, and you may be right, but if we don't want demagogues like Trump popping up we're gonna have to make some sacrifices. Tradeoffs and all that jazz.
Can you be in charge of trade policy please? Targeted tariffs mostly on China is the way to go. Need to break supply chain dependence on critical stuff like batteries with China. . With broad based very inefficient and we run the risk of a global trade war. As to the currency we have seen competitive devaluations before that end up accomplishing nothing. We Devalue. They devalue. You’re back where you started.
Does being a reserve currency cancel out the exchange rate pressures, or do they just build up over time? Looking at the British Pound post Suez Crisis tends toward the latter conclusion -- the pound lost 75% of its value in the 5 decades after losing reserve currency status. Similarly for the end of the Spanish empire, although the influx of gold from the New World had huge inflationary effects, so that may not be a fair comparison.
It's worth pointing out that the exchange rate effect of tariffs (that do not affect the deficit) converts the tariff into a tax on exports and a subsidy on imports of any non-tariffed item.
And when some trade is in intermediated goods the crosscutting taxes and subsidies can produce wild degrees of protection and dis-protection of the income flows to labor and capital.
Outside of imports of items that a hostile power has a near world monopoly in, there are few reasons to have a any import restriction on any item at all. [Yes and that included "industrial policy" where the policy instrument should be production subsidies.]
Silly question but isn't the strong dollar also at least in part at the root of our wealth? If we devalue the dollar wouldn't Americans be much poorer?
Actually, no. Just the opposite. If we "devalue" by running smaller fiscal deficit, [I assume our deficits >Σ(expenditures with NPV>0)] that means we are shifting resources from consumption to investment and getting wealthier faster.
Growing Budget Deficits Minimize Impact of Tariffs in Reducing Trade Deficits
The effectiveness of higher tariffs in reducing trade deficits seems doubtful given the rising budget deficit. Funding U.S. investment growth requires a positive national savings rate combining private, corporate, and government savings. However, the budget deficit exceeds combined private and corporate savings, resulting in a negative U.S. net saving rate. This forces reliance on foreign savings, generated by exports to the U.S., to fund U.S. investments. Consequently, trade deficits will likely continue to grow alongside a rising budget deficit to meet U.S. investment funding needs).
"The real problem here is the U.S. dollar’s status as the world’s reserve currency". Can you talk more about this? Being the reserve currency may be more of a liability than an asset now. Trade deals between China and Saudi Arabia are collateralized by UST, which affects our trade indirectly by pushing up demand for US financial assets and strengthening the dollar. How do we stop being the reserve currency? Tax capital inflows and outflows? Reduce payments on foreign holders of treasuries? Bitcoin???
I loved the Hudson Bay Capital reference and was reading it myself a few days ago. It is titled "A Users Guide to Restructuring the Global Trading System." I recommend it to other readers.
The dollar being a reserve currency is not very important as countries don't hold much in reserves. [Foreign holding of US currency is a nice side gig but not really important, either.] The wealth generator is the US financial system being at the center of so much of world commerce.
This may be a stupid question, but I understand that tariffs would lead to devaluation of the yuan due to less demand but why would this strengthen the dollar? Where does the extra demand for the dollar come from?
It’s not increased demand for dollars, it’s decreased supply, because some of the people who had dollars for sale only had them because of Americans buying Chinese goods. If that stops, then you have to buy dollars from Americans who don’t have any particular reason to want to get rid of them, so you have to pay more for those dollars.
If I’m understanding correctly - tariffs may not raise prices by as much as we anticipate because the tariffs will improve our purchasing power through a stronger dollar?
Since this article relates to the upcoming Trump administration, I thought I'd share my thoughts on the 2024 election in general since I just subscribed on here today. In my view, it's the Supreme Court's fault that Trump won the election. This is because had Trump been held accountable for what he did on J6, it would've damaged his campaign to the point where Harris would've won the popular vote by at least 5 points, and she would've definitely taken all the swing states giving her 319 electoral votes. The reason we didn't get the J6 trial before the election was because SCOTUS did everything to prevent this from happening which is why they are to blame for Trump's victory. Please let me know whether you agree with me or not on this.
Agree with these conclusions and isn't that why we all started shoveling cash into equities and crypto when Trump got elected? He is scary for the dollar. Between inflationary policies and mercantilist goals, seems like a bad time to sit on lots of cash.
What about the flip side - U.S. exports? In the event of broad-based devaluations of other currencies, or devaluations from a major trading partner like China, won't our exports become more expensive in those other countries, leading to a decline in U.S. income from exports? Asking for a state (Oregon) this is highly export dependent.
Yes, exactly right!
This from Oregon's state economist in his new revenue forecast:
"...(t)he State of Oregon may be particularly vulnerable to economic crosswinds in the next presidential term. Trade policy is likely to be specifically oriented toward Pacific trading partners (impacting western states to larger degree); and it is poised to be particularly focused on the semi-conductor/tech sectors, which are vital pillars of Oregon economic activity. Meanwhile, based on recent history, retaliatory measures from major US trading partners have been particularly punitive toward domestic agriculture, timber and manufacturing—all of which are core industries of the state, as well. As trade tensions increased in 2017-18, Oregon statistics on production and unemployment both deteriorated relative to national trends."
Can you be more clear about what policy changed where?
larger/small deficits in the US tax/subsidize US exports/imports. This favors/disfavors Chinese exports/imports.
I've always been convinced that the issue is that Trump hears "$800 billion deficit" and thinks the US is in some real sense losing that much money, like a company's P&L.
That's probably true. But then he hears "strong dollar" and things "Mmm, STRONG!". And yet you can't have both...
He'll find a way I'm sure. No problem for him.
It all boils down to the success of the US financial sector. That leads to persistent financial account surpluses, thus persistent current account deficits.
Don't worry. Trump will force his GOP Congress to transfer control of the Fed to the Executive Branch, and bludgeon it into cutting the Prime. Or just simply bully the Fed with that threat. The Prime will be slashed, the economy juiced. But inflation and consumer pricing will then surge--turbocharged by tariffs on building material (and other) supply chains.
The GOP will get creamed in the '26 midterms by voters enraged over soaring consumer pricing; including many of those who just voted to punish Harris for the inflation that happened during Biden-Harris.
Xi will move on Taiwan in '27, and if Trump guts CHIPS & the IRA--as he's said he will--China will kick our ass when we quickly deplete our stocks of smart munitions and drones.
This all depends on the timing being just right.
No, it's US fiscal deficits.
I cannot fathom why anyone cares about reducing the US trade deficit. If the US imports more than it exports, what that means in practice is that the US is getting lots of useful goods, while foreigners are getting lots of pieces of paper with dead guys printed on them. Why is this an issue?
I think what people don't understand is that America and China don't actually import or export anything. People just buy stuff from each other. Some of those people live in the USA, some live in China, but that isn't really economically relevant. In certain special cases where goods have defense value, like batteries, what country the buyer and manufacturer are located in might be important. But most of the time it doesn't matter.
<If the US imports more than it exports, what that means in practice is that the US is getting lots of useful goods, while foreigners are getting lots of pieces of paper with dead guys printed on them.>
First off, consumption may be the ultimate end in economics, but in national defense it's production that takes the cake. Offshoring your entire industrial capacity, especially for critical components like semiconductors, is essentially living off of tomorrow today. I'm not much of a China hawk (or a liberal internationalist), but even I can recognize that importing Chinese-made components for modern weapons systems is a bad idea in the long run.
Second, if the U.S. gets essentially free stuff for bits of paper, then the economic benefits of having the dollar as the reserve currency have been massively understated by economists. Moreover, if and when the dollar stops being the global reserve currency, the U.S. is going to need to have industrial capacity, if only to gain hard currency to finance imports (like we did under the gold standard). I know Noah's still bullish on the dollar, but then again people said the sun never set on the British Empire, until it eventually did.
Third, Noah's probably going to disagree with this, but a 100% consumer society that doesn't produce anything material doesn't exactly strike me (or most people, including a lot of working-class MAGA voters) as an attractive end goal for liberalism. People need to feel useful, and for some reason or another industrial jobs are better at giving them meaning than most other jobs (at least for working-class types). You might say that's economic nonsense, and you may be right, but if we don't want demagogues like Trump popping up we're gonna have to make some sacrifices. Tradeoffs and all that jazz.
Can you be in charge of trade policy please? Targeted tariffs mostly on China is the way to go. Need to break supply chain dependence on critical stuff like batteries with China. . With broad based very inefficient and we run the risk of a global trade war. As to the currency we have seen competitive devaluations before that end up accomplishing nothing. We Devalue. They devalue. You’re back where you started.
If we devalue by running a smaller budget deficit we wind up with higher growth. [I assume our deficit > Σ(expenditures with NPV>0)]
You could index the tariffs to an exchange rate peg and adjust them quarterly (or more often), so exchange rates will not be a tariff escape valve.
That sounds like a recipe for runaway exchange rates.
Nope. You have sequester the tariff revenue to shrink the trade deficit,
What does that have to do with keeping the tariffs constant?
It could be part of the federal reserve's mandate to manage this tax
Does being a reserve currency cancel out the exchange rate pressures, or do they just build up over time? Looking at the British Pound post Suez Crisis tends toward the latter conclusion -- the pound lost 75% of its value in the 5 decades after losing reserve currency status. Similarly for the end of the Spanish empire, although the influx of gold from the New World had huge inflationary effects, so that may not be a fair comparison.
It's worth pointing out that the exchange rate effect of tariffs (that do not affect the deficit) converts the tariff into a tax on exports and a subsidy on imports of any non-tariffed item.
And when some trade is in intermediated goods the crosscutting taxes and subsidies can produce wild degrees of protection and dis-protection of the income flows to labor and capital.
Outside of imports of items that a hostile power has a near world monopoly in, there are few reasons to have a any import restriction on any item at all. [Yes and that included "industrial policy" where the policy instrument should be production subsidies.]
Silly question but isn't the strong dollar also at least in part at the root of our wealth? If we devalue the dollar wouldn't Americans be much poorer?
Actually, no. Just the opposite. If we "devalue" by running smaller fiscal deficit, [I assume our deficits >Σ(expenditures with NPV>0)] that means we are shifting resources from consumption to investment and getting wealthier faster.
https://substack.com/refer/andy.216
Growing Budget Deficits Minimize Impact of Tariffs in Reducing Trade Deficits
The effectiveness of higher tariffs in reducing trade deficits seems doubtful given the rising budget deficit. Funding U.S. investment growth requires a positive national savings rate combining private, corporate, and government savings. However, the budget deficit exceeds combined private and corporate savings, resulting in a negative U.S. net saving rate. This forces reliance on foreign savings, generated by exports to the U.S., to fund U.S. investments. Consequently, trade deficits will likely continue to grow alongside a rising budget deficit to meet U.S. investment funding needs).
"The real problem here is the U.S. dollar’s status as the world’s reserve currency". Can you talk more about this? Being the reserve currency may be more of a liability than an asset now. Trade deals between China and Saudi Arabia are collateralized by UST, which affects our trade indirectly by pushing up demand for US financial assets and strengthening the dollar. How do we stop being the reserve currency? Tax capital inflows and outflows? Reduce payments on foreign holders of treasuries? Bitcoin???
I loved the Hudson Bay Capital reference and was reading it myself a few days ago. It is titled "A Users Guide to Restructuring the Global Trading System." I recommend it to other readers.
The dollar being a reserve currency is not very important as countries don't hold much in reserves. [Foreign holding of US currency is a nice side gig but not really important, either.] The wealth generator is the US financial system being at the center of so much of world commerce.
This may be a stupid question, but I understand that tariffs would lead to devaluation of the yuan due to less demand but why would this strengthen the dollar? Where does the extra demand for the dollar come from?
It’s not increased demand for dollars, it’s decreased supply, because some of the people who had dollars for sale only had them because of Americans buying Chinese goods. If that stops, then you have to buy dollars from Americans who don’t have any particular reason to want to get rid of them, so you have to pay more for those dollars.
If I’m understanding correctly - tariffs may not raise prices by as much as we anticipate because the tariffs will improve our purchasing power through a stronger dollar?
Since this article relates to the upcoming Trump administration, I thought I'd share my thoughts on the 2024 election in general since I just subscribed on here today. In my view, it's the Supreme Court's fault that Trump won the election. This is because had Trump been held accountable for what he did on J6, it would've damaged his campaign to the point where Harris would've won the popular vote by at least 5 points, and she would've definitely taken all the swing states giving her 319 electoral votes. The reason we didn't get the J6 trial before the election was because SCOTUS did everything to prevent this from happening which is why they are to blame for Trump's victory. Please let me know whether you agree with me or not on this.
What happens if you completely prohibit the import of a certain product from China?
Agree with these conclusions and isn't that why we all started shoveling cash into equities and crypto when Trump got elected? He is scary for the dollar. Between inflationary policies and mercantilist goals, seems like a bad time to sit on lots of cash.
Not sure if this is the real/full reason, but this is a great comment.