Backing Trump on tariffs, not on tone

I’m nota Donald Trump supporter. On the contrary, I dislike the US president for his abrasive behaviour. For Mr Trump, everything is nothing but numbers. Compassion has no meaning in his dictionary.

- Chartchai Parasuk

But I’m behind him on the issue of raising tariffs and a trade war because I am an economist. The US has a chronic current account deficit, which reached as high as 3.9% of GDP last year. The country has been exporting its wealth to pay for the deficit. This is surely not acceptable, and something must be done to lower the deficit to a sustainable level.

Something like this was done before in 1985, called the Plaza Accord Agreement, which reduced the US trade deficit from US$114 billion (3.8 trillion baht) in 1985 to $28.6 billion in 1991, a 75% reduction. Instead of polite negotiation and gradual market adjustments, the arrogant Mr Trump wants immediate reduction by imposing massive tariffs. Despite an understandable intention, Mr Trump has become the anti-free trade villain.

But let's now look at the economic theory of international trade, which is the core of the Plaza Accord Agreement and its call fora sharp adjustment of the US dollar.

This is how economics textbooks teach economics students. There should be no long-term trade surplus or deficit, as changes in currency value would restore the balance. When Country A has a trade surplus over Country B, then B is required to pay money to A for the surplus. The inflow of trade payments would cause the currency of A to appreciate, and it would do the opposite to the currency of B. Consequently, goods from Country A would become more expensive in Country B’s currency and vice versa. B then buys less from A, and A buys more from B. Over time, trade between these two countries would return to balance.

If the “invisible” hands can do their job, no tariffs or trade war would be necessary.

What happens when there is no adjustment of currency value, or, worse, the currency of B does not depreciate but appreciates? Invisible hands, if allowed, would do their miracle job again. B would keep buying more goods from Auntil B runs out of foreign reserves. Trade would stop dead there.