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Corresponding Author:
Riccardo Fiorentini, Department of Economics, University of Verona, Italy

The Persisting US Trade Deficit. Is Protectionism the Right Answer?

Volume 73 - Issue 2, May 2020
(pp. 155-186)
JEL classification: F13, F33, F41
Keywords: Protectionism, Trade Deficit, Tariffs, Trump, Dollar, Savings, Investments

Abstract

On January 22, 2018, the Trump administration imposed tariffs on $8.5 billion of imports of solar panel and $1.8 billion for washing machines. This move marked the beginning of what is now considered a trade war the USA is fighting against China and other traditional American trade partners. The “official” motivation for President Trump’s trade war is that the persisting US trade deficit depends on “unfair competition” by trade partners. Tariffs are therefore seen as a political tool for levelling the field of international trade. In this paper we present and discuss two main objections to this view: the first is that current and trade account disequilibria are ultimately due to differences between domestic savings and investments driven by macroeconomic fundamentals which in general do not depend only on the trade policies of foreign countries. The second objection consists in the fact that the role of the US dollar as the “world’s money” in the current asymmetric international monetary system makes the US trade deficit both inevitable and sustainable in the long run. Protectionist measures may reduce bilateral deficits but cannot eliminate the overall structural trade deficit unless they permanently affect the domestic savings-investment balance.


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