Trump's Tariff Policy & The "Failure to Launch"

The "Failure To Launch" in Trump's tariff policy is not due to "bad math," excessively high tariff rates, or the sharp drop in the stock market. Its lack of support and success arises from a misunderstanding of the core reasons behind the US trade deficit. Structural factors have a greater influence on the US trade deficit than the tariff policies of other countries.

For instance, the United States currently has a trade deficit exceeding $500 billion with China. Is this due to China "cheating," or is it the result of structural differences between the two countries? It''s mainly the latter.

In the United States, consumer spending makes up approximately 70% of GDP, whereas in China, it constitutes less than 40%. The average income in the US, nearly $70,000, is almost five times higher than that in China. Considering the significant disparities in consumption and income, it's understandable that the US purchases more from China than China does from the US. This doesn't mean that China's domestic policies might not contribute to the trade imbalance, but they are not the main reason for the bi-lateral trade imbalance.

An often overlooked factor is the differing operating strategies between US companies and foreign companies. Traditionally, US companies have concentrated on their domestic market, as it is the largest and most affluent consumer market globally. Additionally, US companies have frequently chosen to manufacture abroad instead of exporting because it was more cost-effective and provided better understanding of consumer preferences in foreign markets.

Conversely, foreign companies see the US market as a source of "additional growth and profits," just like US companies do. Moreover, many foreign companies produce goods specifically for the US market. How many US companies manufacture products specifically for export? Very few.

As President Ronald Reagan stated in 1988 after signing the "free trade agreement with Canada, the "expansion of the international economy" is not our enemy. This implies that to address the US trade imbalance, the US should focus on internal factors, such as the fiscal deficit, instead of assuming that taxing foreign entities will resolve the issue. As a result, Trump's current tariff policy framework will not achieve its goals or objectives, as it focuses on external factors rather than domestic ones, causing significant economic and financial costs for both the US and the world.