When the report on international trade came out earlier this month, protectionists were up in arms. Through February, the US' merchandise (goods only, not services) trade deficit with the rest of the world was the largest for any two-month period on record. "Economic nationalists" from both sides of the political aisle, think this situation is unsustainable.
Meanwhile, some investors ran for the hills when President Trump started announcing tariffs on steel, aluminum, and other goods, thinking this was the reincarnation of the Smoot-Hawley tariffs that were a key ingredient of the Great Depression.
We think the hyperventilating on both sides needs to stop.
In general, nothing is wrong with running a trade deficit. Many states run large and persistent trade imbalances with other states and, rightly, no one cares. We, the authors, run persistent trade deficits with Chipotle and Chick-fil-A, and we're confident these deficits are never going away.
Running a trade deficit means the US gets to buy more than it produces. In turn, we have this ability because investors from around the world think the US is a good place to put their savings, leading to a net capital inflow that offsets our trade deficit. Notably, foreign investors are willing to invest here even when the assets they buy generate a low rate of return. As a result, this process can continue indefinitely.
It's important to recognize that free trade enhances our standard of living even if other countries don't practice free trade. Let's say China invents a cure for cancer and America invents a cure for Alzheimer's. If China refuses to give their people access to our cure, are we better off letting our people die of cancer? Of course not!
Imposing or raising tariffs broadly would not help the US economy. Nor would imposing tariffs on specific goods, like steel or aluminum. Giving some industries special favors will only create demand for more special favors from others. It'll grow the swamp, not drain it.