Trump’s Misguided Trade Policy

So much for Donald Trump’s key election promise that he would eliminate our country’s trade deficit and increase manufacturing employment. Eighteen months into his second term, he has been as unsuccessful as he was during his first term meeting those policy objectives. Worse yet, as a result of his budget policy recklessness, there is every reason to believe that in the remainder of his second term, the trade deficit will stay wide, and manufacturing employment will continue to decline. When it comes to the trade deficit, Trump seems to have learned little from his unfortunate experience with the trade deficit during his first term. During the first three years of his first term, before the onset of the Covid pandemic, despite the increased resort to import tariffs, the trade deficit in goods and services increased by around 20 percent to $610 billion. It did so as the budget deficit sapped savings by widening from 3.1 percent of GDP in 2016 to 4.6 percent of GDP in 2019. Instead of learning from that experience that a necessary condition for improving the trade deficit is an improvement in the country’s saving and investment balance, Trump continues to believe that the silver bullet to eliminating the trade deficit and increasing manufacturing employment is the erection of a high import tariff wall. That has induced Trump to raise import tariffs in a chaotic manner over the past eighteen months, to their highest level in the past one hundred years.   If there is one thing upon which economists can agree, it is that the trade deficit is the result of a country spending on consumption and investment more than it produces. Those countries like the US that spend on consumption and investment more than they produce will have trade deficits, while those like China that spend less than they produce will have trade surpluses. This will be true irrespective of the level of the country’s import tariffs. So long as the country saves less than it invests, it will run a trade deficit. Viewed through this lens, it is easy to understand why during Trump’s first term, the trade deficit on goods and services widened to around 3 percent of GDP in 2019 despite the increase in import tariffs. It did so in large part because even before Covid, the budget deficit had widened by around 1.5 percentage points of GDP. That had the effect of sapping the country’s savings level at the same time that investment was being incentivized through tax policy. Something similar now seems to be occurring in Trump’s second term. Despite an even steeper hike in tariffs than in Trump’s first term, the trade deficit remains stubbornly high. For 2025 as a whole, the trade deficit in goods and services was virtually unchanged from the previous year at $900 billion. Meanwhile, the US trade deficit in goods increased by almost 10 percent in 2025 to a record $1.3 trillion, or around 4.5 percent of GDP. As a result, far from increasing as Trump promised, manufacturing employment has declined by around 80,000 so far during Trump’s second term. Once again, the main culprit for the maintenance of a large trade deficit appears to be Trump’s failure to rein in the budget deficit. Indeed, already under Trump’s watch, that deficit is now running at close to 6 percent of GDP. Unfortunately, following the large unfunded tax cuts of Trump’s Big Beautiful Bill Act, the Congressional Budget Office is forecasting that the budget deficit will remain at above 6 percent of GDP as far as the eye can see. That makes it all too likely that we will not see any meaningful reduction in the trade deficit or any increase in manufacturing employment anytime soon. This is not to say that Trump’s tariffs are not having any economic effect. One thing that they are doing is shifting the source of the trade deficit away from China mainly towards other Asian economies. Another thing that Trump’s tariffs, especially on steel and aluminum, are doing is increasing manufacturing costs outside the steel and aluminum industries. More troubling yet, from a long-term point of view, those tariffs must be expected to reduce the benefits that the US might derive from international trade and reduce the degree of competitiveness in the US economy. In short, if Trump really wants to eliminate the trade deficit, he needs to take serious steps to rein in the budget deficit. Needless to add, he should do so in any event to keep the public debt from growing at an unsustainable rate which presently is putting the country well on the road to a bond market crisis. The post Trump’s Misguided Trade Policy appeared first on American Enterprise Institute - AEI .