U.S. President Donald Trump is trashing the world trade system over a basic economic fallacy. He wrongly claims that America’s trade deficit is caused by the rest of the world ripping off the U.S., repeatedly stating things such as, "Over the decades, they ripped us off like no country has never been ripped off in history…”
Trump aims to close the trade deficit by imposing tariffs, thereby impeding imports and restoring trade balance (or inducing other countries to end their rip-offs of America). Yet Trump’s tariffs will not close the trade deficit but will instead impoverish Americans and harm the rest of the world.
A country’s trade deficit (or more precisely, its current account deficit) does not indicate unfair trade practices by the surplus countries. It indicates something completely different. A current account deficit signifies that the deficit country is spending more than it is producing. Equivalently, it is saving less than it is investing.
America’s trade deficit is a measure of the profligacy of America’s corporate ruling class, more specifically the result of chronically large budget deficits resulting from tax cuts for the rich combined with trillions of dollars wasted on useless wars. The deficits are not the perfidy of Canada, Mexico, and other countries that sell more to the U.S. than the U.S. sells to them.
Trump blames the rest of the world for America’s deficit, but that’s absurd. It is America that is spending more than it earns.
To close the trade deficit, the U.S. should close the budget deficit. Putting on tariffs will raise prices (such as for automobiles) but not close the trade or budget deficit, especially since Trump plans to offset tariff revenues with vastly larger tax cuts for his rich donors. Moreover, as Trump raises tariffs, the U.S. will face counter-tariffs that will directly impede U.S. exports. The result will be lose-lose for the U.S. and the rest of the world.
Let’s look at the numbers. In 2024, the U.S. exported $4.8 trillion in goods and services, and imported $5.9 trillion of goods and services, leading to a current account deficit of $1.1 trillion. That $1.1 trillion deficit is the difference between America’s total spending in 2024 ($30.1 trillion) and America’s national income ($29.0 trillion). America spends more than it earns and borrows the difference from the rest of the world.
Trump blames the rest of the world for America’s deficit, but that’s absurd. It is America that is spending more than it earns. Consider this. If you are an employee, you run a current account surplus with your employer and a deficit with the companies from which you buy goods and services. If you spend exactly what you earn, you are in current account balance. Suppose that you go on a shopping binge, spending more than your earnings by running up credit-card debt. You will now be running a current account deficit. Are the shops ripping you off, or is your profligacy driving you into debt?
Tariffs will not close the trade deficit so long as the fiscal irresponsibility of the corporate raiders and tax evaders that dominate Washington continues. Suppose, for example, that Trump’s tariffs slash the imports of automobiles and other goods from abroad. Americans will then buy U.S.-produced cars and other merchandise that would have been exported. Imports will fall, but so too will exports. Moreover, new tariffs imposed by other countries in response to Trump’s tariffs will reinforce the decline in U.S. exports. The U.S. trade imbalance will remain.
While the tariffs will not eliminate the trade deficit, they will force Americans to buy high-priced U.S.-produced goods that could have obtained at lower cost from foreign producers. The tariffs will squander what economists call the gains from trade: the ability to buy goods based on the comparative advantage of domestic and foreign producers.
The budget deficit is not due to the salaries of civil servants, who are being wantonly fired, or to the government’s R&D spending, on which our future prosperity depends, but rather to the combination of tax cuts for the rich, and reckless spending on America’s perpetual wars...
The tariffs will raise prices for automobiles and wages of automotive workers, but those wage hikes will be paid by lower living standards of Americans across the economy, not by a boost of national income. The real way to support American workers is through federal measures opposite to those favored by Trump, including universal health coverage, support for unionization, and budget support for modern infrastructure, including green energy, all financed with higher, not lower, taxes on the wealthiest Americans and corporate sector.
The federal government does not cover its overall spending with tax revenues because wealthy campaign donors promote tax cuts, tax avoidance (through tax havens) and tax evasion. Remember that DOGE has gutted the audit capacity of the IRS. The budget deficit is currently around $2 trillion dollars, or roughly 6 percent of U.S. national income. With a chronically high budget gap, the U.S. trade balance will remain in chronic deficit.
Trump says that he will cut the budget deficit by slashing waste and abuse through DOGE. The problem is that DOGE mispresents the real cause of the fiscal profligacy. The budget deficit is not due to the salaries of civil servants, who are being wantonly fired, or to the government’s R&D spending, on which our future prosperity depends, but rather to the combination of tax cuts for the rich, and reckless spending on America’s perpetual wars, U.S. funding for Israel’s non-stop wars, America’s 750 overseas military bases, the bloated CIA and other intelligence agencies, and interest payments on the soaring federal debt.
Trump and the Congressional Republicans are reportedly taking aim at Medicaid—that is, at the poorest and most vulnerable Americans—to make way for yet another tax cut for the richest Americans. They may soon go after Social Security and Medicare too.
Trump’s tariffs will fail to close the trade and budget deficits, raise prices, and make America and the world poorer by squandering the gains from trade. The U.S. will be the enemy of the world for the harm that it is causing to itself and the rest of the world.
