Donald Trump delivered his closely-watched Liberation Day tariff event on Wednesday. To most watchers, his speech was much severe than expected as he announced a 10% universal tariff on all goods coming to the US.
Trump’s goals with these tariffs are to raise money to offset his planned tax cuts, reduce the trade deficit with other countries, and boost manufacturing at home. This explains why the United Auto Workers (UAW) celebrated the tariffs and the end of NAFTA.
However, a closer look at history and common sense shows that Trump will not achieve these goals. In particular, these tariffs will make the US trade deficit worse.
Why the US has a large trade deficit
For starters, including Donald Trump, a trade deficit is the difference between what a country exports and what it imports.
A country has a large trade deficit if it imports less than what it exports. The US has been exporting less over the years for three main reasons. First, the cost of doing business in the country has gotten higher, with many companies paying workers over $20 an hour.
Second, the trade deals the US has made in the past made it easier for companies to just relocate their plants to cheaper countries like China and Mexico.
Third, the US has imposed restrictions on its advanced products. For example, it has barred companies like NVIDIA, Micron, and Intel from selling products to countries like China and Russia.
Therefore, for the US to narrow its deficit, it needs to boost its exports and reduce its imports.
Why Trump’s tariffs will increase the trade deficit
The first reason why these tariffs will not work is that history shows that these tools don’t work. As you recall, Trump imposed higher tariffs on China during his first term. Since then, China’s trade deficit has remained being substantial. China had a $295 billion surplus in 2024, higher than the $279 billion it had a year earlier.
The total US trade deficit has continued growing despite Trump’s tariffs in his first term, which Biden did not remove. This deficit jumped from $500 billion in 2015 to $918 billion last year.
Second, Trump’s tariffs will make American goods more expensive and uncompetitive internationally. That’s because these tariffs apply to everything, including raw materials.
A good example of this is Airbus and Boeing. In this case, Airbus will continue to spend less money on steel and aluminium than Boeing since the EU has not applied a 25% tariff on these metals. The impact is that Boeing will continue to lose market share in the aviation industry.
Another good example is in the automobile sector. US auto manufacturers will now need to pay higher costs, increasing their vehicle prices, making them uncompetitive internationally. This is a notable industry since the US sold vehicles worth $178 billion in 2024.
Third, US trading partners have announced measures to respond to US tariffs. Many of them are targeting industries that the US does business, and those that they can easily replace. For example, countries like China will likely place limits on US agriculture, which explains why Trump is seeking another bailout for the sector.
Countries, especially Europeans, may seek to boost their energy imports from other countries as a response to these tariffs. For example, they can pivot from the US to countries in the Middle East.
Solution to US trade deficit crisis
The US has a trade deficit crisis that could get worse over time. However, tariffs are not the solution. Instead, the US should work to reduce the cost of doing business in the country and remove the protectionist policies that have existed for a while.
Reducing business costs includes slashing unnecessary regulations that make it harder to build in the US.
Removing trade restrictions, especially to China, would lead to more sales and make Beijing dependent on US technology. Instead, what restrictions on China sales has done is that it has pushed the country to start building its products, which it then sells cheaply internationally.
Joe Biden’s CHIPS Act is also a good way to reduce the deficit as it will make the US a bigger player in the high-tech industry.
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