On Trade Deficits and Tarriffs PART I: Trade Balances are Worse than Useless Let's imagine there are only three countries: the US, Canada and Mexico. Let's further imagine that these three countries produce and consume all the goods and services that they need locally except for three situations: 1) The US buys lumber from Canada 2) Canada buys steel from Mexico 3) Mexico buys automobiles from the US Now, the trade balances will go like this: US: In a trade deficit with Canada that just gets bigger and bigger. US: In a trade surplus with Mexico that just gets bigger and bigger. These trade balances don't mean anything. Nothing is out of whack. There is no limit to how high they can go, and nothing ever needs to be paid back to anybody (it is not debt). Therefore I recommend ignoring trade balances entirely. They are a silly useless metric that causes far too much confusion (including in Trump's mind). PART II: Trade is win-win In free markets, people trade with other people only of their own free will. They are never compelled to make a specific trade. Therefore we can assume that both parties to a trade doing so willingly actually value the received goods and services moreso than they value the disposed of goods and services. Therefore trade is win-win. Therefore,.the more free trade that occurs, the richer everybody gets. PART III: Tariffs and their purpose Tarriffs are local import taxes you charge your own citizens in order to protect local industries who produce the same products at a higher price. This may be necessary for a number of different reasons: 1) Local industry is fledgling and not efficient yet, and you are giving them time to improve 2) Currency exchange rates are out of whack from purchasing-power-parity, and so you are preventing efficient local industry from suffering the devastation of this artificial imbalance. Any other reason for imposing tarriffs causes a net loss since as already argued, trade is win-win. Trump may impose tarriffs in order to drive a hard bargain, but they are still a net loss while they last. It is just that in Trump's case, they generally don't last long, they were more of a threat than a long-term policy. Since currency exchange rates change rapidly, I am of the opinion that tariffs should change rapidly too. But they don't. Generally they are written into legislation and hard to change quickly. IMHO government could do far better in this regard.