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Trade and the balance of payments
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The USA is running a negative current account balance of about $500 billion dollars per year.

Almost 3 percent of GDP.

This is a big OOPS.

This does not mean much to most people but it is really, really important.

Before your eyes glaze over, I promise to make this clearer.

Donald Trump has put his finger on this real problem that has been wrecking parts of our country and sending lots of Americans into the poor house.

The theory starts out pretty simple.

Your country should make the products that it is good at. It should then trade those products with other countries which are good at what they do.

That way everyone is better off. If trade does not balance over time, then one partner ends up with the short end of the stick of money and the other country is enriched. Trade which is not balanced over time is not fair. It is certainly not "free."

Tariffs are the tools that have been used to address this imbalance and the "free traders" of the liberal left just hate tariffs.

That is why when Trump speaks of tariffs going up, the liberal establishment has to go breathe in and out of a brown paper sack.

It is also true that if you quickly ramp up tariff rates, other countries will do the same and trade then is very rapidly diminished and everyone loses. So the solution to negative trade balances should be "Creeping Tariffs" to allow for orderly adjustments over time.

Take China for instance.

For each year our current account balance with China is negative we should add one percent additional tariff on their goods and services imported to the US. This would be additive over time.

With the passage of a few years, the trade balance will seek an equilibrium and we will improve the wellbeing of our citizens and still maintain trade with other countries if they in turn figure out what to buy from us.

Trade is only "fair" if it is balanced over time.

Big tariff moves are destructive.

Little steps will allow adjustments to be made without wrecking the world or us.

Tariffs are like good whiskey.

A small shot makes the day a little better, but a whole lot all at once will wreck your day and for sure the next morning.

Gary Pichon
Marble Hill

 

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