Let's stop the trade deficit blame game(PIIE)
Maurice Obstfeld
March 19, 2025
Whatever the cause of the US trade deficit, economists believe that setting tariffs in the range President Donald Trump has floated will not affect it decisively. Tariffs could have some effect on saving and investment, but it is unlikely that they would greatly change the saving-investment balance or push it in one direction or the other.
Three recent macroeconomic developments could reduce the US deficit. One is the European realization that more defense spending is imperative, exemplified by incoming Chancellor Friedrich Merz's efforts to relax Germany’s stringent fiscal rules. A second is China’s announcement of enhanced fiscal stimulus in response to US tariffs and domestic economic difficulties. A third would be a US recession, brought on primarily by the unprecedented economic uncertainty from erratic implementation of tariff policies, mass deportations, and large-scale layoffs and contract cancellations by the Trump administration. A recession would likely raise saving by compressing consumption, and it would surely depress investment—but even if a lower trade balance is a worthy goal, this is not the method of trade-balance reduction that anyone wants to see.
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