If the U.S. or Donald Trump manages to reduce the attractiveness of the U.S. dollar, treasuries (U.S. bonds), and stocks, then the U.S. trade deficit may indeed shrink or disappear but many Americans will notice that the lower purchase parity resulting from the relatively weaker dollar – one that isn't stronger than expected – isn't something that they really wanted.
Ask people e.g. in the black Africa: Would they love to earn a strong currency and be rich by printing pictures of Benjamin Franklin or his African counterpart if there were one – instead of the hard work they have to do today? They would definitely love it! It's largely irrational for Trump to dream about the balanced trade or a weaker dollar. The apparent Trump's weak dollar policy (which is so different from the strong dollar policy verbally supported by most Trump's predecessors) is a result of his one-sided mercantilism. America would surely realize rather quickly that it doesn't contain just workers who want to be employed – it also (or primarily!) harbors over 300 million consumers who want to buy products cheaply! ;-)
I think that every competent economist agrees that a maximally free trade in the whole world is the best setup that maximizes the advantages for all sides, allocates the right jobs to the people who have the appropriate comparative advantages, and that's where the world would converge if it were both rational and acting cooperatively.
In this context, I must emphasize – because lots of PC people want to obscure this point – that the free trade does not imply the free movement of the people or labor. At least since the abolition of slavery, people aren't just "another class of products" that may be sold. So countries have a very good motivation to freely exchange products but they have even better reasons to keep on protecting their territories from the influx of immigrants.
There is absolutely no reason why the movement of products should follow the same rules as the movement of the people – in spite of the fact that the EU ideologues love to demagogically claim that they're inseparable because the demagogues have invented the term "single market" for their union.
While it's better if tariffs are absent, I have also argued that at the end, Trump's tariffs may be just as bad as taxes but not worse. Trump has reduced some taxes and increased some tariffs. They're different animals but both of them contribute some money to the federal budget. The U.S. is importing a lot of things – and rather regularly – so the tariffs may be as predictable and reliable a source of income for the government as taxes. On top of that, some tariffs may discourage some unnecessary transfer of products to other continents – which may often be just a way to waste energy.
Lots of acts have been made in this "slowly starting" trade war. A French minister said that the U.S. is playing according to the "rules of the jungle" (he primarily meant the unilaterally imposed tariffs) and they won't negotiate with the gun next to their heads (well, maybe they will be forced to negotiate, anyway, or shot dead – the French verbal heroes should be more careful before they brag that the gun pointing to their head won't affect their behavior).
Some people say that Trump's tough attitude is just a negotiating tactic. However, a sufficiently vigorous trade conflict could kill lots of U.S. producers. Will Trump see the light before Harley-Davidson (or another legendary U.S. brand) is killed? I am not sure. He has surely persuaded me that he's eager to cripple much of the international trade, indeed, and perhaps kill Harley-Davidson or someone else along the way – Trump seems to be hostile to Harley-Davidson, anyway. But maybe, it's his carefully crafted trick to fool even people like me into thinking that when it comes to trade, he is a borderline lunatic. I am not really sure whether he's one or he just pretends to be one.
A day ago or so, Treasury Secretary Steven Mnuchin said:
My message is pretty clear. It's the same message the president delivered at the G7: If Europe believes in free trade, we're ready to sign a free trade agreement with no tariffs, no non-tariff barriers and no subsidies. It has to be all three.Wow, that would be quite a development in the trade war if this were possible. European and Chinese leaders have framed themselves as the restrained sides in this Trump trade war. But now they have a real opportunity to show that they're real advocates of the free trade.
Needless to say, if I could make the decision for Europe or the EU, I wouldn't hesitate much. I would say Yes to Mnuchin's plan within seconds. The cancellation of tariffs would be great for trade, the cancellation of subsidies would be great even internally for removing the distortions of the market within Europe, and the same would hold for the abolition of the non-tariff barriers to trade – various quotas, technical harassment, bogus environmental and other rules whose real goal is to ban some imports, and so on.
(The notorious "eurobanana" bill defines a "banana" as a yellow fruit whose curvature radius is longer than a rather high constant with the units of length – the actual main goal of the "eurobanana" legislation was always to claim that the sweeter, attractive, Latin American bananas aren't real "bananas" because they're too curved, and to protect some domestic producers of the European bananas. That's a rather typical non-tariff barrier to trade, I guess.)
I am afraid that there are so many powerful players – such as the Czech prime minister Babiš – who have become so dependent on gigantic EU subsidies (billions of crowns a year, in Babiš's case, and it's not just for rape) – that the European Union will probably say No to Mnuchin's proposal. But imagine if some miracle occurred and Europe, America, China, Japan, and others would instantly abolish all tariffs, subsidies, and non-tariff barriers to trade.
That would clearly turn the Trump administration – a group of people who have earned the image of aggressive protectionists – into the most pro-free-trade heroes in the history of the mankind.
So please, European politicians and EU apparatchiks: Say Yes to Mnuchin's proposals. It's completely fair and balanced. Maybe Trump could agree with a compromise – which would allow a one-time compensation for the domestic companies that would be negatively affected by the switch to the truly free international trade.
If you say No, dear European officials, you will be co-responsible for the potential escalation of the trade war because we will know that you will have had and you will have missed the opportunity to stop the hostilities – and turn them into a great improvement for the global economy instead.
While the U.S. is crippling its trade relationships with the rest of the world – which Trump must believe to be a good thing, probably because of the U.S. trade deficit (but he's wrong) – others seem to be making their trade freer. Days ago, the European Union and Japan signed a cool free trade treaty. Such positive developments are not being discussed too much but they're great. Not all the changes that are currently taking place in the international trade are bad.