What is the basis for Trump’s “liberation day” tariffs? Once you’ve removed all the lies and looked at the way they were calculated, you understand that the tariffs are based on the trade balance between the US and every other country. The formula calculates the tariff needed to balance trade, assuming a rather simplified and linear response of demand to prices, which is almost certainly incorrect from the get go. But I think that instead of just shouting about how stupid this is, we should have a closer look at the underlying assumption that a balanced trade would be a good thing for America.

I will not discuss the “exorbitant privilege” here, that actually allows the US to run a persistent trade deficit, but instead look at even more fundamental economics to see what this all means. Economic theory certainly doesn’t say that balanced trade is a bad thing. But what does it mean if a country that has a large trade deficit currently is trying to achieve balance of trade? If a country regularly imports more than it exports, to achieve trade balance it needs to either export more, or import less, or both.

Exporting more is not a bad idea for a country. But if we look at the data, we see that the US has a particularly low trade to GDP ratio. Only 11 percent of GDP is exported, and 15 percent imported. Compared to most other countries, imports and exports are relatively small compared to the internal economy. In other words, exports are low, because Americans consume most of what they produce, and there is very little left to send elsewhere. And if you look at the various factors of production, you’ll see that there isn’t much room for improvement here. Unemployment is low, productivity already high, and demographics combined with anti-immigration policies don’t suggest that there will be much labor force available for any theoretical increase in US manufacturing capacity.

The most realistic way to increase exports would be to consume less of the manufactured goods, and consuming less is obviously also the solution to decrease imports. And this is exactly what tariffs do: They decrease consumption by raising prices. Decreasing consumption to match production is certainly not a crazy idea in economics, and everybody visiting a personal financial advisor due to a debt problem is probably getting exactly that advice: Don’t spend more than what you earn. The difficulty isn’t economics, but politics. For Americans to achieve trade balance by consuming less, Americans would have to lower their standard of living. That not only will be unpopular in itself, it will also be highly regressive, as luxury consumption is such a small percentage of GDP. Compared to the rest of the world, Americans own and buy more stuff. But that doesn’t mean that they would be happy to adjust that consumption downwards.

If we assume that through all the chaos and frequent changes the Trump administration will ultimately pursue their goal of a more balanced trade, and will make at least some progress towards it, the most likely outcome will be them failing the famous “are you better off than you were 4 years ago?” test at the next elections. In as far as I am not 100% sure how crazy Trump really is, or in how far he is just successfully playing a crazy guy on TV, I consider it possible that he is aware that many of his policies will have unpopular outcomes. He is more of a crash and burn rather than fade away type of guy.