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Since Trump’s return as POTUS everyone is inundated with the news about Trump’s tariffs on just about every country in the world. His reasoning is that other counties have always taken advantage of the USA, and it is time that the USA rights the imbalance of trade. He has said that he has always believed in tariffs, harking back to before 1913 when income tax was implemented. Of course, any thinking person would know that these tariffs are paid by the importers, and eventually by the consumers if they are passed on. Since 1913, the world has undergone phenomenal changes that have affected all aspects of life, leading to the current global economic situation, where it appears that no country can stand alone. In my lifetime, I have seen China, once referred to as a “paper tiger” bustling with people on bicycles, to a current tech-developed world with all its trimmings. This is also true for many developing countries as the world turns.
What I have not seen or heard from economic pundits is the role of people purchasing power (PPP) on trade imbalance. It has always been my belief that the concept of supply and demand is dependent on PPP, viz. the ability of people to have the means to buy what they want. Thus, in my view a trade imbalance may always occur if a country with a small population sells to a country with a large population, regardless of the PPP of each of the countries. In the developed western countries where the affluence/living standard is similar but not the population, should one not expect a trade imbalance? For example, Canada’s population of 40M selling to the USA with a population of 330M will, undoubtedly, result in a negative trade balance for the USA with a larger population whose need/consumption is greater. What about poorer countries whose population does not have the means (PPP) to buy items beyond those necessary for survival? Those countries are not exempted from Trump’s tariffs.
Since I am not an economist, am I missing something in my thought process in this arena?
in my view, the only reason tariffs would be justified is when it can be shown that products are being dumped, i.e. when they are being imported for less than the cost to produce, in order to unfairly gain market share. Or for certain strategic industries where national security is involved. Blanket tariffs on entire countries is ridiculous.
I’m no economist so your mileage may very well vary. The problem is that see it is that it is all or nothing. Instead if tariffs were used more surgically to target certain industries with the intention of building a domestic infrastructure to support such industries meaning having a labor pool and factories etc., there could be a place for them. What we have now feels chaotic and poorly thought out. This will result in higher costs to consumers as already mentioned. Secondly a global economy has the characteristics where some are producers and others are consumers. The US is a consumer driven economy which is a good thing and speaks to our standards of living compared to many other countries. To make us a producer of items to balance some arbitrary trade number is illogical at best and maybe pure stupidity at worse.
Unfortunately the current confrontational strategy is not poorly thought out at all. It is planned and deliberate — not to strengthen America economically but to tap into the viscerally xenophobic, America-against-the-world attitudes of Trump’s political base. Trump himself may not understand the damage this will do to the US economy in general and the buying power of consumers in particular, but at least some of his advisors certainly do, and it is an intentional choice to pursue this path in the interest of political power. And the inevitable impacts will simply be blamed on someone or something other than the Trump administration.
Feisal,
You might not be an economist but what you write is common sense, something the ultimate decision maker in this case is totally lacking. No matter who tells him, he is not willing to admit that tariffs are taxes on the importers and the purchasers of the tariffed goods.The new tariffs might just end up being one of the largest tax increases ever imposed on the US population in history. There is no way that the trade imbalance will be eliminated by imposing tariffs without the total collapse of our economy. IMHO to eliminate the trade deficit the tariffs would have to be so high that most Americans would have to practically stop spending on anything but essentials necessary to survive which would lead to a severe depression. Only the haves will have the disposable income to purchase non essentials. The economy can not be robust on the spending of only the haves. We need a large middle class which is rapidly disappearing.
Mr. Brahim, while I am not an economist, I trust that these findings from AI-assisted searches will contribute to answering your questions.
1 – PPP theory explains the exchange rates between currencies
2 – trade imbalances are the result of much broader set of economic variables and policies beyond just the purchasing power of consumers in each country
3 – One example to support #2 above, and to show the (il)logic of the current tariff talk: US had a surplus $56 billion worth of goods with the Netherlands in 2024, a country with a population of about 18 million, and GDP per capita of $69K compared to $85K for Americans. Although the Netherlands imported more from the US than it exported, it faces a tariff increase to 15% along with other EU countries.
4 – For entertainment only: the US imposed a 10% tariff on Australia’s Heard Island and McDonald Islands. It has zero humans, only King penguins and seals.
The consensus among economists and foreign policy experts is that tariff negotiations are about more than just trade imbalances.