Inconvenient Truths About Tariffs and America's Trade Deficits

The chart shows that foreign tariffs on US goods and services are not much higher than US tariffs on their foreign counterparts. European tariffs on US goods and services are less than 2% higher than their American counterparts. There were no tariffs between the US, Canada, and Mexico prior to Trump's trade war. My forecast is the planned Republican tax cuts guarantee that the US continues to run high trade deficits. In fact, they will grow as higher government deficits raise US interest rates and strengthen the dollar. A higher dollar reduces the price of imported goods and services and raises the price of American exports. 

In light of the small tariff differentials no trade agreement is likely to compress the US trade deficit. Now there are always non-tariff barriers that a free trade agreement could dismantle, but some will undoutedly remain because many counties have higher quality and safety  standards than the US. For example, European meat has lower bacterial counts than American meat. Food poisoning is rare  in Europe whereas it is common place in the US. If you buy American chicken, it spoils within a day or two in the refrigerator due to high bacteria counts. This is why American industrial agriculture heavily uses antibiotics. It is the only way to prevent American poultry from disease and death due to the cramped conditions that lower the cost of meat. So European meat is priced 10% to 15% higher, but safer. The chickens are also happier. ☺ It is unlikely that Europe would lower its safety standards to accommodate the US desire for more trade. 

Bigger US deficits are guaranteed given the planned Republican tax cuts. Higher deficits lead to a stronger dollar which makes US exports more expensive, but imports cheaper. This is exactly what happened during the Reagan era. The Republicans created huge government deficits, interest rates skyrocketed (I remember buying bank certificates of deposit at a 8.25% annual rate on a six month term), the dollar's value rose to historic levels, and an enormous trade deficit developed with Japan. 

Consequently, I give the Republican administration a D minus. Their two chief economists are mediocrities that were picked because they rationalize what Trump wants to do. No one in the economics profession had even heard of these two guys before they were added to Trump

shadow cabinent. Trump's team is mostly yes men. It severely damages Trump's fragile ego for people to disagree with him just like his buddy Vlad.