The unconventional economic theory behind Trumps sweeping tariff plans [Video]

President-elect Donald Trump’s plan to impose tariffs on all foreign goods relies on an economic theory that challenges traditional thinking about what causes chronic U.S. trade deficits and what can – or should – be done to shrink them.

For most of the past 40 years, the United States has imported more products from abroad than it has exported to other countries. Many economists say the resulting trade deficits contributed to the loss of more than 5 million factory jobs beginning in the late 1990s.

The standard explanation for the chronic deficit blames Americans for living beyond their means, by consuming more than they produce. The U.S. personal savings rate is less than half what it was in the early 1990s and government budget deficits are much larger, lending support to that assessment.

But an alternative view, championed by Michael Pettis, a Wall Street veteran who teaches finance in Beijing, …