Tariff wars are likely to be disinflationary
Special points to highlight in this issue:
• Contrary to what many seem to believe, tariffs, even if they are much more widely implemented in the US, China, and elsewhere, are not likely to exacerbate inflationary pressures. On the contrary, they are more likely to be disinflationary because they will weaken global demand.
• Tariffs do not affect trade imbalances by changing relative prices. They affect trade in the same way as currency depreciation or wage suppression do. In each case they reduce trade deficits or increase trade surpluses by reducing the household share of GDP and so forcing up domestic savings. In the world of excess savings in which we live, policies that force up savings in one part of the global economy can automatically cause savings in another part of the global economy to drop – either through rising unemployment or rising debt – if the excess savings are exported to advanced economies that don’t need foreign savings, rather than to developing economies that do.
• If Washington is successful in reducing the US trade deficit, and if this in turn forces contraction in the Chinese trade surplus, there are logically only four ways China can accommodate this contraction: one way requires higher unemployment; two ways require higher debt burdens; and the fourth way requires a politically very difficult rebalancing in the distribution of domestic income. China must choose among the latter three ways or it will be forced to “choose” unemployment.
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