It seems that, for President Donald Trump, the key for economic growth is demand for goods and services. In this view, the greater the demand, the greater the supply is via production and consumer spending, and thus the greater the economic growth. Now, part of the demand for domestically-produced goods and services originates from overseas. The meeting of this demand is called exports. Additionally, local residents exercise demand for goods and services produced overseas, which are imports.
According to this view, an increase in exports and a reduction in imports (i.e., the improvement in the trade balance) strengthens overall demand for domestically-produced goods and services. As a result, this strengthens economic growth in terms of the gross domestic product (GDP). Therefore, the rationale follows that the imposition of tariffs that curtails imports will greatly benefit the US economy.
Let us say that, out of an additional dollar received, individuals spend $0.90 and save $0.10. Now, let us also assume that, because of the imposition of tariffs on imports, the demand for locally-produced goods increased by $100 million. The recipients of the $100 million consume 90 percent of the $100 million (i.e., they raise expenditure on goods by $90 million). The recipients of the $90 million spend, in turn, 90 percent of the $90 million (i.e., $81 million). Then the recipients of the $81 million spend 90 percent of this sum, which is $72.9 million, and so on. Note that the key feature here is that the spending by one person becomes the income of another person. At each stage in the spending chain, the assumption is that individuals spend 90 percent of the additional income they receive. This process eventually ends, with the total gross domestic product (GDP) increasing by $1 billion (10 x $100 million) (i.e. by the multiple of 10).
It seems that President Trump believes that if money is spent locally, it will benefit the American economy massively. It would appear that the US president follows in the footsteps of Abraham Lincoln, who is alleged to have said,
I do not know much about the tariff. I do know that when I buy a coat from England, I have a coat and England has the money. But when I buy a coat in America, I have the coat and America has the money.
Production and Demand
The imposition of tariffs in order to curb imports and thus strengthen the demand for US-produced goods and services will not strengthen the local production of goods and services without the enhanced structure of production. At any point in time, it is the stock of savings and accumulated capital goods that allows for economic growth.
The enhancement and the expansion of the infrastructure is what sets in motion economic growth. The enhancement and the expansion of the infrastructure, in turn, is only possible because of prior saving that sustains producers through the period of production. Hence, anything that weakens saving and development of capital structure undermines the prospects for economic growth.
An increase in demand for locally-produced goods and services because of the imposition of tariffs—without the time-intensive development of a domestic structure of production to produce those goods and services—will ultimately divert resources from wealth-generating activities. This will undermine the formation of savings, thus weakening economic growth.
We must also remember that it is not the “US” that imports and/or exports goods and services, but individuals who live in the US. For example, it is not the “US” that exports wheat, but a particular farmer or a group of farmers who want to sell at agreed-upon prices to willing buyers in another country. They are engaged in the exports of wheat because they expect to profit. Likewise, it is not the “US” that imports Chinese electrical appliances, but individuals from the US. They import these appliances because they want them. In a market economy, each individual sells goods and services for money and uses money to buy desired goods and services. The goods and services sold by individuals could be called their “exports” while the goods and services bought could be called their “imports.”
In a free market economy, individuals’ decisions regarding buying and selling goods and services (i.e. their exports and imports) is made voluntarily, otherwise it would not occur. The emergence of an exchange between individuals implies that they expect to benefit from it. According to Rothbard, “There is therefore never a need for anyone to worry about anyone else’s balance of payments.”
The current practice of lumping individuals’ trade balances into a national trade balance is of little relevance to businesses. What possible interest can an entrepreneur have with the national trade account balance? Will it assist him in the conduct of his business? According to Mises,
While an individual’s balance of payments conveys exhaustive information about his social position, a group’s balance discloses much less. It says nothing about the mutual relations between the members of the group. The greater the group is and the less homogeneous its members are, the more defective is the information vouchsafed by the balance of payments.
While the national trade account balance is of little economic significance to businesses, individual or company trade balances carry economic importance. For instance, the trade account balance statement of a particular company could be of help to various investors.
The fallacy of the national trade account balance is also relevant to the national foreign debt. If an American lends money to an Australian, the entire transaction is their own private affair and should not be of any concern to anyone else. Lumping individuals’ foreign debt into the total national foreign debt is a questionable practice. What is this total supposed to mean? Who owns this debt? What about all those individuals who do not have foreign debt? Should they also be responsible for the national foreign debt?
The only situation with which individuals should be concerned regarding foreign debt is when the government incurs the debt. The government is not a wealth-generating unit and, as such, derives its livelihood from the private sector. Consequently, any foreign government debt incurred means that the private sector will have to foot the bill in the present and sometime in the future.
Conclusion
What drives the tariffs policies of the US president is a concern that the trade deficit undermines the growth rate of the Gross Domestic Product (GDP). Government and central bank policies designed to reduce the trade deficit can only lead to the misallocation of resources and the lowering of living standards.
