What Is the Rationale Behind Current US Tariff Policy?
It seems that, for President Donald Trump, the key for economic growth is demand for goods and services. In this view, the greater the demand, the greater the supply is via production and consumer spending, and thus the greater the economic growth. Now, part of the demand for domestically-produced goods and services originates from overseas. The meeting of this demand is called exports. Additionally, local residents exercise demand for goods and services produced overseas, which are imports.
According to this view, an increase in exports and a reduction in imports (i.e., the improvement in the trade balance) strengthens overall demand for domestically-produced goods and services. As a result, this strengthens economic growth in terms of the gross domestic product (GDP). Therefore, the rationale follows that the imposition of tariffs that curtails imports will greatly benefit the US economy.
Let us say that, out of an additional dollar received, individuals spend $0.90 and save $0.10. Now, let us also assume that, because of the imposition of tariffs on imports, the demand for locally-produced goods increased by $100 million. The recipients of the $100 million consume 90 percent of the $100 million (i.e., they raise expenditure on goods by $90 million). The recipients of the $90 million spend, in turn, 90 percent of the $90 million (i.e., $81 million). Then the recipients of the $81 million spend 90 percent of this sum, which is $72.9 million, and so on. Note that the key feature here is that the spending by one person becomes the income of another person. At each stage in the spending chain, the assumption is that individuals spend 90 percent of the additional income they receive. This process eventually ends, with the total gross domestic product (GDP) increasing by $1 billion (10 x $100 million) (i.e. by the multiple of 10).
It seems that President Trump believes that if money is spent locally, it will benefit the American economy massively. It would a
Article from LewRockwell
LewRockwell.com is a libertarian website that publishes articles, essays, and blog posts advocating for minimal government, free markets, and individual liberty. The site was founded by Lew Rockwell, an American libertarian political commentator, activist, and former congressional staffer. The website often features content that is critical of mainstream politics, state intervention, and foreign policy, among other topics. It is a platform frequently used to disseminate Austrian economics, a school of economic thought that is popular among some libertarians.
