On Friday, negotiations on a new North American Free Trade Agreement hit an inflection point. Talks between the U.S. and Canada hit an impasse, with talks set to continue next week. Yet President Donald Trump has made clear he plans to strike a new deal within 90 days — with or without the U.S.'s Canadian partner.
Percolating in the background is the growing likelihood that the U.S. will impose an additional $200 billion worth of tariffs on China as early as next week, Bloomberg reported on Thursday.
It all raises the question of what Trump's endgame could look like, if the mere threat of a global trade war becomes an actuality. Economists and investors have been sweating over the consequences for the world economy if the U.S. can't reach a consensus with major economies like Europe, Canada and particularly China.
According to some economists, at the heart of Trump's thinking about the trade war lie two key assumptions: That the world's largest economy can narrow both its burgeoning deficit by renegotiating commercial ties with its major trading partners, and that tariffs can help accomplish these goals — by at least forcing countries to the bargaining table.
In early August the president hinted as much himself ,when he declared that his menu of tariffs were working "big time." He raised eyebrows by claiming that tariffs could somehow pay down the federal debt, which currently stands at more than $21 trillion.
Donald J. Trump
✔
@realDonaldTrump
..Because of Tariffs we will be able to start paying down large amounts of the $21 Trillion in debt that has been accumulated, much by the Obama Administration, while at the same time reducing taxes for our people. At minimum, we will make much better Trade Deals for our country!
According to economists, Trump's declaration harked back to an era when the federal government's main source of tax revenue was derived from tariffs. According to economic historian Brian Domitrovic, that status quo prevailed until the early 20th century, but declined as the U.S. economy developed into the world's most advanced.
Economists like David Wessel, director of the Hutchins Center on Fiscal and Monetary Policy at Brookings Institution, think it's "not plausible" that the U.S. will collect enough money to pay down the debt — especially with the federal government spending with no end in sight.
"The president seems to be in love with the budget we had 100 years ago," Wessel told CNBC in a recent interview. "Once upon a time the federal government got most of its revenue through tariffs, but at the time, the federal government was much smaller [and] there wasn't Social Security, Medicare, Homeland Security" and other big-ticket spending items that cost trillions, he added.
"It's hard to believe we're going to get a lot of revenue out of this, and there's no way we get enough to start paying down the debt," Wessel said.
On one hand, the stimulus feeds domestic demand — leading consumers to purchase more both at home and from abroad. However, it also deprives the government of revenues, and ratchets up deficit spending that at some point may trigger an economic crisis.
Steve Hanke, a professor of applied economics at Johns Hopkins University and a former member of Ronald Reagan's economic team, described the deficit problem to CNBC as one that's "made in America."
"No matter what happens, the trade deficit is going to get bigger, [and] Trump will have egg on his face. He's doing the one thing that will expand it — he has blessed a larger fiscal deficit."
