Trade Deficits and Tariffs

Tariffs, quotas, and other protectionist measures are connected to trade deficits. The trade deficit is the monetary difference between imports and exports of a specific country.

What is our trade deficit which moves up and down constantly depending on the value of the dollar, the state of the economy, government spending, savings, taxation, and investment?

The data available from 2018 show that the U.S exported $2.5 trillion in goods and services and imported $3.121 trillion from other countries, thus our trade deficit was $621 billion. One third of exports then involved services such as tourism, intellectual property, and finance, and goods exported include aircraft, medical equipment, refined petroleum, and agricultural goods. U.S. imported computers, telecom equipment, apparel, electronic devices, autos, and crude oil. According to CFR, the deficit in goods was $891 billion, higher than the total deficit because “the goods deficit was offset by the surplus in services trade.” The U.S. Trade Deficit: How Much Does It Matter? | Council on Foreign Relations

According to the currently running Debt Clock, the U.S. trade deficit is approximately $1.271 trillion and the trade deficit with China is approximately $295 billion. U.S. National Debt Clock : Real Time

Tariffs and quotas have been used to reduce trade deficits by discouraging imports and promoting domestic production if a specific industry still existed in the U.S. and had not been moved entirely to another country such as China, Canada, and Mexico in order to take advantage of their cheap labor and the lack of environmental regulations. At that time, American workers who lost their jobs to this type of globalism were forced to train their replacements in foreign countries where the plants had been moved.

Keynesian economists believe that the trade deficit could be shrunk if more economic growth would take place abroad thus inducing foreign citizens to buy more American goods. But some countries make it almost impossible for Americans to export their products to the European Union, for example.

Two other routes of balancing the trade deficit are also explored in Keynesian economics, more saving or less investment. The U.S. personal savings rate has been declining for decades; the savings decline recorded in 2006 as minus one percent is the worst since the Great Depression in the 1930s. The rationale behind savings increase is that, if Americans save more, U.S. will borrow less from abroad. The dollar would become cheaper, and the trade deficit would shrink. Tax incentives might encourage Americans to save more, but it has not worked well.

Reducing U.S. domestic investment in real GDP (Gross Domestic Product) has proven to work only temporarily in the 2001 recession.

William J. Baumol wrote that “if our trade deficit persists, we will have to borrow more from foreign investors who, at some point, will start demanding higher interest rates. At best, higher interest rates will lead to lower investment in the U.S. At worst, interest rates will skyrocket, and we will experience a severe recession.”

The third remedy for our trade deficit is to limit imports by imposing tariffs, quotas, and other protectionist measures. Keynesian economists believe that tariffs “superficially save American jobs and conveniently shifts the blame for our trade problems onto foreigners.” But other nations will retaliate with their own tariffs.

Protectionism can increase X-IM (exports-imports). If Americans buy less imports, reducing the supply of dollars on the world market, the value of the dollar will increase. But a rising dollar would hurt U.S. exports and encourage more imports from other countries. Consumer behavior will always change in the direction of buying what is cheapest for them, they do not care whose economy they help or hurt.

Budget deficits and trade deficits are linked by the fundamental equation,

X – IM = (S - I) – (G – T). [X is exports, IM is imports, G is government spending, and T is taxation]. Following this equation, the U.S. trade deficit must be reduced by a combination of lower budget deficits, higher savings, and lower investment, all variables that are difficult to coordinate.

American consumers are not alone in their preferences for goods and services. Speaking of trade deficit, “according to the historian Pliny, the demand of Rome’s elite for silk, precious stones, pearls, and other luxuries from highly developed empires in the east was so great that it drained Rome’s coffers of silver. One hundred million Roman sesterces ended up in Arab, Indian, and Chinese pockets annually.” (History Magazine, Ancient Rome, March 2025)