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American Focus > Blog > Economy > Clearing the Air on Tariffs and Trade Deficits
Economy

Clearing the Air on Tariffs and Trade Deficits

Last updated: April 25, 2025 1:15 pm
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Clearing the Air on Tariffs and Trade Deficits
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Let’s dissect this argument piece by piece. To start, is having a trade deficit with a specific country inherently negative? The short answer is no. A personal analogy can illustrate this. My household, for instance, spends over $5,000 annually on groceries from Safeway. Yet, those savvy marketers at Safeway contribute nothing to my income. If you have a job, your employer operates at a trade surplus with you, spending significantly more on your labor than you do on their products. This isn’t a cause for concern.

The same logic applies to trade relations between nations. In 2024, the United States recorded a trade deficit of approximately $36 billion with Canada, not the inflated $100 billion that President Trump conjured up. Contrary to Trump’s assertions, spending more on Canadian imports than Canadians do on our exports does not equate to subsidizing Canadians—any more than I’m subsidizing Safeway. It’s unreasonable to expect a zero-sum trade balance with any nation. In fact, in 2024, the United States enjoyed trade surpluses with countries like the Netherlands ($56 billion), Hong Kong ($22 billion), Australia ($18 billion), and the United Kingdom ($12 billion). Did this create issues for those nations? Their leaders, and seemingly many citizens, don’t appear to think so. It mirrors the dynamic of having a trade surplus with your employer.

Now, what about the U.S. overall trade deficit with the world? In 2024, we exported $3.19 trillion in goods and services while importing $4.11 trillion, resulting in a total trade deficit of $0.92 trillion. But where did that $0.92 trillion go? Did it vanish into thin air? If only it had; our government would be spending less than 10 cents to print a $100 bill. For every $100 we received, we got equivalent goods and services in return. That’s a deal I’d jump on any day. The reality, however, is that the majority of that money returned to the United States as investment. Foreign entities utilized it to purchase U.S. government bonds, real estate, and equipment, or made direct investments. The United States, despite its myriad challenges, remains a favored destination for global investors. Here’s the irony: while Trump expresses delight over foreign investment in the U.S., he simultaneously frets about our trade deficit. It’s a classic case of two sides of the same coin: the trade deficit and capital surplus are essentially reflections of one another.

The above is from my latest Hoover article, “Clearing The Air On Tariffs And Trade Deficits,” Defining Ideas, April 24, 2025.

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And:

On April 2, President Trump took to the Rose Garden to unveil his strategy for implementing “reciprocal tariffs” on imports from various countries. However, the chart he presented was not grounded in the actual tariffs imposed by those nations but rather in an equation that completely overlooked the tariff rates from other governments. While he listed countries targeted for higher tariffs, he conveniently omitted that the tariffs imposed by forty-four nations are in fact lower than the average tariffs the U.S. charged before Trump’s increases. Admittedly, many of these nations are smaller, yet they include significant players like Canada, France, Germany, Italy, and Japan. Trump did not propose reducing tariffs for these countries, which contradicts his claim of seeking reciprocal tariffs.

But let’s set that aside for a moment. Imagine, hypothetically, that every country’s government imposes higher tariffs on our exports than the U.S. does on imports. What would be the optimal response from our government?

The answer may surprise you, but rest assured it’s grounded in decades of economic reasoning and evidence: the optimal strategy would be to eliminate our tariffs entirely.

Why, you ask? It’s true that when foreign governments impose tariffs on our exports, it adversely affects our producers. However, it also negatively impacts consumers in those foreign nations. If our government retaliates with tariffs on imports from those countries, it benefits our producers competing against those imports but simultaneously harms our consumers. These consumers are not only end-users but also producers who rely on those tariffed goods as inputs. It’s relatively straightforward to demonstrate, with the aid of a supply and demand graph, that the losses incurred by our consumers outweigh the gains enjoyed by our producers.

Thus, the bottom line is that regardless of the actions taken by other countries, the best course of action for our government—if it weighs consumer losses equally with producer gains—is to adopt a zero-tariff policy.

And finally:

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Two notable figures from the last century used metaphors to underscore this point. One was President Reagan, who in the early 1980s noted that if you’re in a lifeboat and someone shoots a hole in it, retaliating by shooting another hole is not wise. Yes, it may hurt the initial shooter, but it will also sink you.

The other was renowned British economist Joan Robinson. She famously questioned whether it made sense for you to put rocks in your own harbor simply because another country was making shipping difficult by doing the same.

In conclusion, I present two plausible arguments in favor of tariffs, the second of which is one I haven’t encountered before, along with a rationale for its uniqueness.

Read the full article.

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