We use a simple model to study the effects of tariffs on the current account balance when a country runs permanent trade deficits. The model features a country that supplies a liquid asset to the rest of the world, which allows the country to run a permanent and sustainable current account deficit. Unlike in models based on the traditional intertemporal approach, tariffs do not affect saving through their effects on real interest rates, and have muted effects on the current account balance. We also show how shifts in liquidity demand and taxes on world liquidity can be interpreted from a trade-policy perspective.
