Correct Diagnosis Wrong Cure?
John Cochrane writes well about tariffs and trade here. A few key points:
The US trade deficit is partly owning to low US savings rates and high Chinese savings rates.
A major issue with the US government deficit of ~1.4 trillion (and, it’s really spending, not just the deficit) is that it’s spent on consumption, not on investment.
The US, like Greece prior to its crisis has been doing a lot of consumption and little investment. This will make it hard to pay back foreign countries/people for the goods and services they sold/sent to the US.
China has got a lot of US bonds and stocks it is holding from the goods and services sold to the US. Much of these savings by the Chinese are to support people in retirement. John Cochrane sees a very high risk that money will not be paid back.
In short Trump somewhat has a correct diagnosis of the trade deficit being an issue – but the wrong cure. Interesting to read Buffett from 2003 on this as well.
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In other news, there’s a trailer out from a Peter Thiel interview. It’s hard to say much without the full interview context (although he seems somewhat pro-tariffs here?!?), but:
He comments that one quarter of the US trade deficit is directly due to China, and one quarter indirectly. [I haven’t verified that.]
Thiel comments that a reshaping of international order is coming (and I think he’s implying, needed).
Some of my own latest thoughts. There are at least to broad issues:
Falling US geopolitical strength versus China. This is a risk for the US.
High consumption, low investment in the US [although there is still a lot of strong investment, e.g. in tech], coupled with a high government deficit.
Solving 2 probably helps a lot with 1, but I’m unsure solving 1 is going to solve 2 (which is what’s happening right now).
Finally, I’d add that I’m overall very uncertain of my views here around the best path forward for trade policy, for the US or for the EU – especially with respect to China.