This is true but it misses an essential point. More saving, i.e. less spending, would weaken aggregate demand and reduce employment. To correct the trade deficit by this method alone would imply engineering a domestic slump.
So, if Americans could be persuaded to save more, then some other sort of demand would have to be higher to fill the demand gap. That is where the trade deficit comes in. America needs both increased domestic saving, a switch of spending from imports to domestic production and stronger external demand for American goods and services.
It isn’t that easy for America to address this situation by engineering a lower dollar. In any case, for Trump, tariffs have a distinct advantage precisely because they do not fall evenly across the board. They can be applied at different rates to different types of goods and at different rates to goods from different countries. Also, they do not normally apply to services.
Accordingly, they can have a distinct impact on the structure of production. In particular, the imposition of tariffs on imports of goods, especially from China, can be thought of as a way of boosting the demand for American manufacturers and increasing employment in manufacturing. Productivity growth is normally much higher in manufacturing than it is in the service sector.
So, if Trump were able to boost the size of America’s manufacturing sector, then that could be seen as helping the prospective growth of productivity – and hence the growth of the economy overall.
This is not to say that Trump’s embrace of widespread and swingeing tariffs is to be admired or recommended. Even if they do not encounter substantial retaliation, tariffs come with high potential costs and severe dangers. They increase inflation – just as when a country experiences a fall in the exchange rate. This is not only because of the direct impact on the cost of goods in the US, but also because increasing the demand for US output puts pressure on limited supply capacity.
