Life is full of tradeoffs: Trump can make stronger growth or a smaller trade deficit his priority, but not both

See Trump’s Growth and Trade Agendas Are at Odds. His Economic Team Will Point to the Winner: Tax cuts, deregulation and budget deficits would push up the dollar and worsen the trade deficit, while steep tariffs would undermine growth by Greg Ip. Excerpts:

"Faster growth and bigger budget deficits boost imports and the dollar, widening the trade deficit and making U.S. manufacturers less competitive. Tariffs dent consumer spending and business confidence and put upward pressure on inflation and interest rates, undermining growth. Trump can make stronger growth or a smaller trade deficit his priority, but not both."

"a stronger dollar and weaker foreign growth would depress U.S. exports (as would retaliation against U.S. tariffs), further undermining Trump’s goal of a smaller trade deficit."

"“Policymakers here are going to have to decide what their priorities are and how to balance things,” said Bruce Kasman, chief economist at JPMorgan. “We’re generating a dynamic that is hurting foreign and helping U.S. growth and pushing the dollar up. It’s not that surprising that you don’t get a beneficial effect on trade.”

When a country spends more than it earns, it runs a trade deficit that it finances by selling assets, such as government bonds, to foreigners. So if reduced regulation and taxes boost investment and household spending, imports will rise and the trade deficit will expand, all else equal.

Meanwhile, foreigners buying the U.S. bonds that finance the trade deficit will push the dollar higher, further widening the trade gap.

That’s what happened in Trump’s first term. Despite higher tariffs, the trade deficit grew by 17% between 2016 and 2019. In that time, the dollar also rose, and the Tax Cuts and Jobs Act, which Trump signed into law in 2017, fueled a 68% widening in the federal deficit."

"Kent Smetters, the group’s head, said foreigners buy about 20% of newly issued U.S. debt. Trump’s “desire to have a weak dollar is not going to be compatible with extending the tax cuts unless there are pay-fors along the way.”"

"That leaves tariffs. But they would have to rise as much as, or more than, Trump has threatened in order to provide meaningful revenue. And the higher the tariff, the greater the hit to consumers and businesses (who pay most of the tariff), and the greater the impact on inflation."

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