Trade Cases

Leibowitz: Tariffs Won't Cure the Trade Deficit

Written by Lewis Leibowitz

By Trade Attorney Lewis Leibowitz

A reader turned me on to a recent column by former U.S. Trade Representative Robert Lighthizer. I have known Ambassador Lighthizer for quite a few years now. He is smart and an able advocate. But that does not mean we see eye to eye.

The column, which appeared in the UK magazine The Economist, said tariffs are needed to correct the chronic U.S. trade deficit. Lighthizer pointed out that the U.S. is “by far the largest importer in the world.” No dispute there. My issue is with the broader context. The trade deficit is the effect, not the cause, of the U.S. being the world’s largest debtor nation.


The difference is crucial. Our trade deficit means that the United States imports more than it exports. It also reflects the gap between domestic saving and domestic investment. The Lighthizer theory ignores this and proposes tariffs as a way to reduce the trade deficit. Of course, the increasing trade deficits of the last three years indicate that tariffs do not necessarily reduce the trade deficit.

A trade deficit is inherently related to a nation’s investments and savings (government, corporate and individual). If a country as a whole saves more than it invests, it generally runs a trade surplus (Singapore and China, for example). If the rates are reversed, it generally runs a trade deficit.

America is a classic case of a chronic trade deficit. And it is not the only one. The UK runs a trade deficit and a foreign investment surplus – and has for a few hundred years. The U.S. is the world’s largest magnet for foreign investment because its appetite and hospitality for investment vastly exceed its savings rate. Principally fueled by deficit spending at the federal level, America’s savings rate is inadequate to fund the desired level of investment. It is therefore inevitable that foreign money must close the gap.

If we import money to make productive investment, we must pay for that by sending money overseas in the form of buying goods and services. There is no free lunch. And all Americans benefit from the level of investment in this country.

So the trade deficit is the inevitable result of an excess of investment over national savings. To reduce it, we must either increase the savings rate or reduce investment (or both). Neither alternative to living with a trade deficit is appealing.

Seeing the trade deficit as an inevitable result of the gap between savings and investment at home reveals policy options that are the antithesis of tariffs. Ambassador Lighthizer, probably because he was an architect of the current policy imposing selective tariffs on steel, aluminum and China, clearly likes tariffs and wants to use them to solve what he describes as an “emergency.”

He sees the emergency as a “net foreign investment deficit” of $15 trillion. This is the difference between U.S. investment abroad and foreign investment in our country. And he says that this emergency is vital to solve and that “the principal driver undoubtedly is the trade deficit.” Economically, that is not correct. He has the cause and effect reversed. The “principal driver” of the trade deficit is the surge in foreign investment in the United States – not the other way around.

The largest single element of that gap is the federal budget deficit, which reduces national savings and is a reflection that the U.S. spends more money than it makes.

Let’s suppose we decided to “fix” the trade deficit by imposing a tariff on imports. I’m not assuming a small thing like the current 25% tariff on imports from China, or steel and aluminum. Let’s talk about putting a tariff on imports above a certain level: 100% tariffs on all goods after we import $1 trillion. Like all reputable economists, we assume away all the technical, logistical and political problems associated with this initiative.

How would that affect the trade deficit? Americans would buy fewer imports. Goods would increase in price, causing domestic investment to fall. Inflation would surge. Savings in the form of stock market portfolios and savings accounts would be depleted to pay for scarcer goods. The net result of all this would reduce exports as well, because global markets would not be favorably disposed toward more expensive exports. The economy as a whole would be no better off, and probably worse off, because the allocation of resources would drift away from the most efficient market-determined balance toward government control.

Would such tariffs increase production of goods in America (manufacturing)? Probably, but not surely. Services are more than 80% of the American economy, and that percentage would surely fall. That would shift the economy more toward manufacturing, about 12% of the economy, and away from services, about 85%. (Agriculture is the rest.)

Does manufacturing need that much help? There is no doubt that manufacturing is an important sector. But its share of national employment is shrinking. That is due not principally to unfair foreign trade practices but to technology. Manufacturing output in the U.S. remains strong but employment is declining and has been for over 60 years!

Trade deficits are not the culprit. No doubt unfair trade practices were partially responsible for manufacturing job losses, but the exact number is a matter of intense debate. For example, in a recent column, Fareed Zakaria noted that China was held responsible by some for two million lost manufacturing jobs in the U.S. from 2000 to 2015. That may be. But as Zakaria pointed out, sixty million jobs disappear in the United States in a typical year. China is not the cause of manufacturing job losses.

Germany, another country with a vaunted manufacturing sector, has seen similar trends in manufacturing employment. The migration to service and high-technology jobs is global and manufacturing job losses appear to be inevitable. Should we implement policies that attempt to hold back the tide?

The “good old days,” if they ever existed, are gone. We don’t live in a world where many countries were devastated by war and colonial rule. The world is developing at a rapid pace. Our best hope of maintaining our prosperity is to maintain a dynamic and globally engaged economy that is competitive – while also paying attention to equality of opportunity for all. There is more to be done on that score.

Let’s give Ambassador Lighthizer his due – he is defending trade policies he helped to create, and he and his colleagues have caused us to think more clearly about the factors that are important.

However, the actions he has proposed could do more harm than good. One example: The U.S. imposes huge tariffs on textiles. Furniture makers in Mississippi need a certain fabric to make couches. That fabric is processed in a way that is illegal in the United States. The textile tariffs caused a shift of employment away from Mississippi and toward China. Why? Because while there was a tariff on the fabric, the tariff on couches made from the same fabric is zero.

Do we care more about the environment or about manufacturing jobs? These are hard issues about which reasonable people can differ. We need more discussion, not less. More tariffs to reduce the trade deficit look to me like a solution that treats the effects rather than the causes.

Lewis Leibowitz

The Law Office of Lewis E. Leibowitz
1400 16th Street, NW, Suite 350
Washington, D.C. 20036
Phone: (202) 776-1142
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Lewis Leibowitz, SMU Contributor

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