Clearing the Air on Tariffs and Trade Deficits

By David R. Henderson. Excerpts:

"First, is a trade deficit with a particular country bad? No. One of the easiest ways to see that is to look at your own spending on other producers’ goods. Consider mine. Our household spends over $5,000 a year on groceries from Safeway. But those scoundrels at Safeway spend nothing on my output. If you’re employed, your employer has a trade surplus with you. He or she spends much more on your services than you spend on his products. But that’s not a problem.

The same reasoning applies to a specific country. Our trade deficit with Canada in 2024 was about $36 billion, not the $100 billion that President Trump seems to have pulled out of thin air. And contrary to Trump’s belief, the fact that we spend more on imports from Canada than Canadians spend on our exports does not mean that we’re subsidizing Canadians, any more than I’m subsidizing Safeway. There’s no reason that we should have a zero trade deficit with a particular country. In 2024, the United States had trade surpluses with the Netherlands ($56 billion), Hong Kong ($22 billion), Australia ($18 billion), and the United Kingdom ($12 billion). Was that a problem for those countries? The heads of those countries and, apparently, many of their citizens, don’t seem to think so. It’s very much like you having a trade surplus with your employer."

"Imagine, contrary to the data, that every country’s government in the world imposes higher tariffs on our exports than the US government imposes on our imports. What would be the best strategy for our government?

The answer may shock you, but I assure you that my answer is based on decades, nay centuries, of economic reasoning and evidence. The answer is: cut our tariffs to zero.

Why? It’s true that when a foreign government imposes tariffs on our exports, it hurts our producers. It also hurts the foreign government’s consumers. If our government responds by imposing tariffs on imports from that country, it helps our producers who compete with those products but hurts our buyers of those items. Those buyers include not just ultimate consumers, but also producers who use the tariffed items as inputs. It’s relatively easy to show, although you need a graph of supply and demand, that the losses to our consumers exceed the gains to our producers.

The bottom line, therefore, is that whatever the other country’s government does, our government’s best option, if it puts the same weight on losses to consumers as it puts on gains to producers, is to have zero tariffs.

Two major figures in the last century used metaphors to make the point. One was President Reagan. In the early 1980s, he argued that if you’re in a lifeboat and someone shoots a hole in the boat, it’s not a good idea to shoot another hole in the boat. Yes, you’ll hurt the first shooter; but you’ll also hurt yourself.

The other was famous British economist Joan Robinson. If someone in another country to which you ship goods puts rocks in the harbor to make shipping more difficult, she asked, does it make sense for you to put rocks in your harbor?"