On January 30, 2025, Paul Krugman joined Markus Brunnermeier for a conversation on “How Will the Second China Shock Play Out?” Krugman is a Professor Emeritus at Princeton University, a Distinguished Professor of Economics at the Graduate Center of the City University of New York, a columnist at the New York Times, and a 2008 recipient of the Nobel Prize in Economics.
A new view of trade imbalances, exemplified by Pettis and Hogan (2024), has gained traction in policy circles and think tanks, arguing that these imbalances are a distortion due to government-actions, hurt deficit countries, and should be addressed with tariffs
There are several problems with this new view. Trade need not be imbalanced if some countries can attract investment better than others. It is also not clear that imbalances lead to deindustrialization, nor that a large manufacturing sector should be a policy objective
Tariffs are never the solution. We know two things about tariffs: (1) they lead to retaliation and (2) will strengthen the dollar, hurting the U.S.’s exports