Protectionism Can't Fix Trade Imbalances

Donald Trump's administration this week announced new tariffs on solar panels and washing machines. It has hinted at more to come. The rationale for these measures is that they'll reduce American trade deficits -- in particular, the widening deficit with China -- and thus benefit the U.S. economy. Rather than take Washington’s assumptions at face value, however, we must consider how protectionism affects capital flows.

Policy makers largely ignore the indirect impact of trade intervention on capital. But what happens to capital is ultimately what will determine how these measures affect the economy.