Donald Trump’s announcement regarding tariffs came as a bombshell. The United States’ trade deficit must be reduced at all costs.

There are four dimensions to analyzing a country’s foreign trade. A view limited to the size of the deficit is too restrictive and does not reflect the value of trade between two countries.

The first three dimensions reflect the dynamics of trade. The fourth is macroeconomic.

The first dimension, put forward by Ricardo in 1817, is that of comparative advantages. A given country can manufacture two goods (to simplify), but it is often more efficient to specialize in the good for which it is most efficient, leaving the manufacture of the second good to another country. Ricardo and others after him showed that such a system is more efficient overall.

Let’s take an example: The United States builds airplanes. They need steel. Should they produce both airplanes and steel, or should they specialize in airplanes and import steel? The latter combination is the most efficient. But it means that the United States will have a deficit in steel with the other country and a surplus in airplanes sold there. The two figures won’t necessarily eliminate each other. It is therefore inefficient to strive at all costs to achieve balance in bilateral trade.

The second dimension is geographical. We tend to trade with the countries that are geographically closest. For the USA, this is Canada and Mexico.

The third dimension is about countries that trade more intensely the more similar they are.

Reading these three points, we note that the zero balance, neither deficit nor surplus, in the relations of a country with the rest of the world is not natural.

The fourth aspect is that of the permanent external deficit of the United States.
A country’s external balance reflects the gap between its domestic savings and its investment. When savings exceed investment, this results in an external surplus. When savings are less than investment, there is an external deficit.
The drift in the US external account simply reflects insufficient savings or, in other words, excessive consumption in relation to the still significant investment plans.
This has nothing to do with trade between two countries, between the USA and Canada for example.
If the point of discussion is the excessive size of the deficit, the only way to combat it is to reduce domestic demand and encourage private or public savings (reducing the budget deficit). Depreciating the dollar has, in the past, helped reduce the deficit, not eliminate it.

The White House’s proposals are confusing regarding all of these elements and the extent of the various imbalances. The problem is that the choices made are at stake for the world’s economic health.