U.S. president Donald Trump's recent protectionist threats to hammer America's most important allies with tariffs have baffled economists. The United States has a massive $566-billion (€461-billion) trade deficit, a red flag to Trump, who is worried by the amount of cash flowing out of the country to import foreign goods.
He believes his country's deficit is a sign that foreign partners are bleeding the United States dry, robbing it of jobs for ordinary workers and hampering its economic potential.
The truth is very different. Trump is both wrong to blame other countries and wrong on the economic effects of America's huge trade deficit. Instead, the United States should look to itself for the explanation.
Let's start with the simple economics. If a country wants to buy more than it produces, it has to import to satisfy demand. Bangladesh, for example, has a comparative advantage in making cheaper clothes of a reasonable quality than the United States can.
The same goes for South Korea's television manufacturing and Chinese mobile phones. Luxury cars from Germany are more expensive but are considered higher quality than American brands. As a result, America buys in all these products instead of making them domestically.
Complementary industries missing
Does the US president want to increase inflation just so America can make clothes, TVs and phones at home? Constructing the facilities, training the staff, building the supply chains are all very expensive in a country that isn't specialized and doesn't have the geographic advantage of nearby complementary industries, as South Korea has when it buys hardware for its TVs from China. Expanding "Made in America" would give the average American less buying power.
At the core of Trump's plan is a grand contradiction to save or even create jobs in waning American manufacturing industries just as the country reaches an almost 50-year low in unemployment.
Recently, the relatively strong (and some say, overvalued) dollar has given Americans even more heft when snapping up foreign products; not the fault of foreigners.
To make matters worse, Trump has already pushed $1.5 trillion worth of tax cuts through Congress and has announced massive fiscal stimulus plans. That can only exacerbate the deficit as imports rise to satisfy the increased spending.
If he really wants to reduce the deficit regardless, the American president's options at home would be to tighten government budgets, encourage better-off consumers to buy American-made products and get workers to save more of their wages rather than spend.
Punishing the countries that, after all, buy those goods that America does send abroad is counterproductive to his goal.
Forget the steel tariffs. They're not likely to have a big impact on consumer prices in the United States.
However, Trump's recent pledges to put tariffs on billions of dollars worth of Chinese goods are a sign that he considers protectionism a viable strategy to "make America great again." Instead, he could make it poorer.