In the news this week there has been talk of trade wars, US President Donald Trump has suggested expanding taxes Chinese imports which is supposed to benefit Amerian producers as they won't have to face competition from Chinese rivals which the Chinese government try to help. If one accepts Ricardo's theory of trade then this policy is not very productive. Ricardo thought that countries benefit from trade by specialising in different fields and that the logic of comparative advantages ensures that all those involved in trade will be better off for it. Now reading liberal media one might think that trade wars are futile because they make everyone worse off than before the trade war started and that, as I've written about before, economic interdependence reduces the risk of war. If those explanations haven't convinced you that trade wars are futile then I have another one to add.
The reason for America's tariffs is, at least nominally, national security but many believe that national security is a pretext to try to use restrictive trade policy to improve the American trade balance, or current account balance as I will refer to it as from now on. First I'd like to point out that these two rationales for why the administration is pursuing tariffs are not neccesarily contradictory, a poor current account balance can have negative impacts on national security but I digress. If we assume that the end goal of the policy is to improve the American current account balance then tariffs are not a solution. The reason why is that current account surpluses and defecits are reflections of the structure of a given country's economy and not due to a set of trade policies. The reason why the USA runs a current account defecit is that the American economy consumes more than it produces so it has to import all that it demands for which the domestic supply cannot cover. Similarly the German economy runs a current account surplus because it produces more than it consumes so it sells the rest of it's goods abroad. If the Trump administration hopes for a reduces trade defecit and tries to use tariffs then it has fundamentally misdiagnosed the problem.
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