Notes On Liberty

Co-editor and Economics professor (who happened to predict the economic crisis of 2008 in a book a year before it happened) Fred Foldvary makes a very important point regarding some of the common fallacies associated with trade deficits and tariffs:

The reason the US has a big trade deficit is that US taxes make exports more expensive. Most other countries have big value added taxes, which get subtracted from export prices. WTO rules allow for the deduction of VAT but not of income taxes from exports. If the US shifted from income taxes to either VAT or LVT (land value taxation), the trade deficit would largely disappear.

But given current taxes and WTO rules and the trade deficit, high tariffs on imports would destroy US comparative advantages, artificially boosting high-cost industries. The US would have to abandon the WTO, and other countries would retaliate with tariffs against the US.


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