When it comes to economics, we know two things about Donald Trump. He is obsessed with the US trade deficit. And he thinks tariffs, or import taxes, will solve the trade deficit problem.<\/p>\n
Trump is wrong on both counts. The trade deficit is not a pressing problem facing the US economy. And to the extent it is a problem, tariffs are a poor remedy.<\/p>\n
The US does have a large trade deficit. In 2024, US imports exceeded exports by $918 billion (3% of US GDP). Around one-third of this total ($293 billion) was with China, despite the tariffs on China imposed in Trump 1.0. Another third was with Mexico and Vietnam ($172 billion and $124 billion, respectively). The US trade deficit with Mexico soared during Trump 1.0 when importers bought cheaper Mexican goods because tariffs made Chinese goods more expensive. Our trade deficit with Vietnam rose as China circumvented US tariffs by moving final assembly of goods there. We now import from Vietnam rather than China, although much of the production takes place in China. Both examples show how tariffs can move foreign production around but not reduce the US trade deficit.<\/p>\n
Yet Trump remains fixated on tariffs. In February of last year, he put an additional 10% tariff on all Chinese imports; he added another 10% for good measure in March. Aluminum and steel imports have faced 25% tariffs since March 12. And the much-touted Liberation Day (April 2) imposed high import taxes on every nation.<\/p>\n
Still our trade deficit keeps growing. Between January and September, the US trade deficit was $765 billion\u2014up $110 billion from the same time period in 2024. Tariffs have not helped.<\/p>\n
Trump\u2019s failure to reduce the US trade deficit stems from his inability to understand that goods are not produced solely in one country. Parts get produced all around the globe, and it is only final assembly from this supply chain that takes place in one nation.<\/p>\n
These supply chains have economic consequences. Steel tariffs make it more expensive to produce cars in the US. Firms located in countries without steel tariffs can now assemble cars at lower cost than firms assembling them in the US, leading Americans to buy foreign-made cars. Furthermore, in many cases Trump\u2019s tariffs fall heavily on US workers. Manufacturing expenses in China account for less than 10% of the cost of making an iPhone. A much larger share comes from US-made components, from US supply-chain management, and from US know-how that developed the product. Tariffs on iPhones assembled in China hurt US workers and firms more than Chinese workers and firms.<\/p>\n
For Trump, however, the problem is that other countries cheat. Since most countries tax US goods at the same rate that we charge them, this claim lacks credulity.<\/p>\n
Other factors are responsible for US trade deficits. First, low production costs abroad. This is not the result of cheating. It is how market economies work. Some nations have many people willing to work for a lot less than what US workers will accept. Seeking higher profits, firms move production abroad to take advantage of lower labor costs. What was produced in the US now gets imported at lower prices.<\/p>\n
Second, trade deficits arise from economic strength. A growing economy, with plentiful jobs that pay good wages, spurs spending. Unwittingly, its consumers buy many foreign-made goods. In contrast, when our trading partners experience sluggish growth, consumers in these nations buy fewer US goods. Ironically, Trump\u2019s tariffs hurt the US economy because they slow the economic growth of our trading partners.<\/p>\n
Finally, the biggest problem with tariffs is that other countries will retaliate. During Trump\u2019s first trade war with China (2018-19), China stopped buying US soybeans. US soybean farmers were ruined. Trump gave them $23 billion and ended his trade war. From this big loss, Trump should have learned that he lacked leverage over China. He did not.<\/p>\n
Following the same script, China retaliated when Trump raised tariffs on Chinese goods earlier last year. China prohibited soybean imports and also halted exports of rare-earth minerals to the US, which are necessary for making iPhones, electric vehicles, and military equipment. Because the US lacks an adequate supply of these minerals, Trump quickly caved. China won again.<\/p>\n
Despite these two big losses, Trump\u2019s view regarding tariffs has not changed. Why?<\/p>\n
His love of tariffs is largely about power. Congress has allowed Presidents to tax imports, and Presidents can veto any attempt to change this arrangement. In other areas the President has much less authority. According to the Administrative Procedures Act of 1946, tariffs are not subject to judicial review unless they are \u201carbitrary,\u201d enabling Trump to be a tariff dictator on day 1 and every day thereafter. All he has to do is declare a national economic emergency.<\/p>\n
The Supreme Court heard a case in early November about the legality of Trump\u2019s tariffs. At present it is not clear how they will rule. Given that imports reduce the cost of living in the US, and that they partly result from a strong economy, it is preposterous that the US trade deficit constitutes an economic emergency. It is also easy to show how Trump\u2019s tariffs are arbitrary. He has proudly announced tariffs on Brazil (with whom the US runs a trade surplus<\/em>) because it prosecuted former President Jair Bolsonaro for instigating a coup after losing an election.<\/p>\n Trump\u2019s love of tariffs is also about crony capitalism and corruption. In August, Apple CEO Tim Cook presented Trump a plaque in a 24-karat gold base and promised $100 billion additional US investment by Apple (above the $500 billion previously promised). Cook\u2019s subservience was broadcast throughout the nation. In exchange, Trump gifted Apple an exemption from his 100% tariff on semi-conductors and smartphones made in China.<\/p>\n Even worse, the S&P 500 index fell 11% in the days following Liberation Day when Trump announced high tariffs on goods from every nation. One week later he reversed course, saying he planned to negotiate 90 trade deals in 90 days. Stocks rebounded. At the end of July, with no trade deals signed, Trump revived his tariffs starting on August 7. Insider trading was rampant immediately before each flip-flop, with short selling before tariffs were announced and stock purchases before tariffs were rescinded. We don\u2019t know how much trading the Trump family did or how much money they made.<\/p>\n The economics of foreign trade and tariffs is rather straightforward. Trade deficits help keep prices down. Tariffs push prices up but don\u2019t reduce trade deficits. Tariffs promote corruption rather than the low-cost production of quality goods. They are almost always bad economic policy.<\/p>\n People don\u2019t care a great deal about where the things they buy are made. They do care about jobs and income. US workers lose income when manufacturing jobs move abroad and don\u2019t get replaced by good jobs. High tariffs won\u2019t bring back these jobs. Even if apparel manufacturing returns to the US from Bangladesh, machines would produce the garments rather than workers.<\/p>\n Reducing the US trade deficit will require what all Republicans abhor\u2014taxing the rich, who have gained from globalization and foreign trade. These revenues will be needed to fund education and training programs as well as other policies that will enable firms to produce more efficiently and increase exports. At the same time these policies will enable more Americans to enjoy a middle-class existence. If Democrats are to recapture the White House and Congress, they need to rally around a program promoting such policies. More on what this program might look like in future articles.<\/p>\n\n Steven Pressman is part-time professor of economics at the New School for Social Research, professor emeritus of economics and finance at Monmouth University, and author of <\/em>Fifty Major Economists (Routledge, 2013)<\/em><\/p>\n\n Source<\/a><\/p>\r\n
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