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Why did Trump launch a trade war? A political economy explanation from the perspective of financial constraints

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  • Dongsheng Di
  • Gal Luft
  • Dian Zhong

Abstract

The existing explanations for President Trump’s decision to trigger a trade war with most of America’s trading partners are not sufficient. The less explored motivation, we argue, is to raise income for the federal government through tariffs in order to balance the surging fiscal deficit caused by Trump’s bold tax cut policy since December 2017. The repeated increase in interest rates by the Federal Reserve throughout 2018 is leading to sharp increase in the cost of servicing America’s US$21 trillion and growing debt, which means that debt servicing would soon become the biggest outlay of the US government. This new explanation implies that the US will need additional sources of income like tariffs in order to balance its budget, and tariffs on Chinese products is viewed as a main source of such income. China should, therefore, rethink its strategy in seeking a resolution for the trade war.

Suggested Citation

  • Dongsheng Di & Gal Luft & Dian Zhong, 2019. "Why did Trump launch a trade war? A political economy explanation from the perspective of financial constraints," Economic and Political Studies, Taylor & Francis Journals, vol. 7(2), pages 203-216, April.
    • Handle: RePEc:taf:repsxx:v:7:y:2019:i:2:p:203-216
    DOI: 10.1080/20954816.2019.1595327
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