I think the reasoning here by #PaulKrugman is not so great. https://www.nytimes.com/2024/08/27/opinion/trump-inflation.html
First, to be clear, he and nearly everybody else are absolutely right that 10%-20% across-the-board tariffs would raise US consumer prices. Trump and his sycophants are ridiculous to deny that.
But Krugman treats the capital account surplus, the “the [net] amount of foreign capital flowing into the United States” as exogenous, as though it would be unaffected. That's wrong. 1/
#economics
Text: More fundamentally, tariffs would tend to raise the foreign exchange value of the dollar, making our exporters less competitive. Why would this happen? The balance of payments always balances — the total inflow of money into America must equal the total outflow. In particular (leaving aside some technical issues involving investment income), it must be true that: Trade deficit = net inflows of capital. So unless we reduce the amount of foreign capital flowing into the United States - the amount that foreign governments, companies and individuals are investing here — we can't reduce the trade deficit. The way that normally plays out is that if we reduce imports, that change is offset by a fall in exports. Squeezing any one piece of the trade deficit is like pushing on a balloon: It just expands someplace else. And the mechanism through which that happens is typically a stronger dollar.
Much of the “foreign capital inflows” are basically vendor finance. Foreign firms sell into the US market, and get dollars in return. In accounting terms, they have “invested” in the US by holding dollars. They typically exchange those dollars for interest-earning Treasury securities and the like. 2/
Foreign entities “disinvest” from the US when they buy US goods and services from those dollars they hold. The scale of net investment is thus a function of the trade deficit, not some independent fact.
It’s certainly true that foreign actors might also have portfolio preferences, they might affirmatively want to accumulate dollars, not only do so as a residual to unbalanced trade. But Krugman effectively assumes that’s the whole story, and the vendor finance is none of it. 3/
I don’t know for sure whether 10%-20% across the board tariffs would reduce the US’ (multilateral) trade deficit. As an old English proverb, and I think Keynes, says, “There's many a slip 'twixt the cup and the lip.” Interational balance of payments has lots of moving parts.
You can tell the story Krugman tells. You can argue that countervailing tariffs by foreign countries will cause US exports to fall more than imports do. 4/
My guess is putting a pretty thick tariff barrier between the US and the world probably would bring the US trade account toward balance rather than away or do nothing.
That doesn’t mean it’s remotely a good idea or wise. It would risk the US dollar’s popularity as a reserve currency (for better or for worse), it would lead at least over a short-term to sharp rises in tradable good prices in the US, it would exacerbate trade tensions with our allies as well as our rivals. 5/
A drug can be effective but not safe, or not worth the cost of its side effects. There are much gentler, much smarter ways to bring the US trade account towards balance, if that’s what we want to do. I favor “capital account protectionism”. https://www.interfluidity.com/v2/540.html
But I think it’s a step too far to say we know tariffs wouldn’t narrow the trade deficit. Sure, they might not. But there are perfectly credible ways they might just.
They are still not a great idea. /fin
