Do Tariffs Reduce Trade Deficits? - by Arnold Kling

The first point is that as far as I can tell, nobody really understands international economics. It’s basically macroeconomics on steroids. There are a huge number of factors that make issues of tariffs, trade surpluses, and the effect of trade on consumption vs. investment very complex.

When I was in grad school, international economics did not seem so hard. I mean, apart from the fact that in the diagrams Dornbusch drew on the board, a currency appreciation was when e went down, and I kept thinking it was supposed to be up. But even though every time he called on me in class I got the answer wrong, I think I got the basic ideas right in the end. I didn’t flunk the class.

The way I learned it, a trade surplus was the mirror image of a surplus of national savings over national investment. National savings is equal to the government budget surplus (haha) plus household saving plus business saving (retained earnings).

When Chinese national saving exceeds what they need to fund their investment and their budget deficit, China has to accumulate foreign assets. They can obtain U.S. Treasury bills, for example.

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