Can tariffs help the United States reduce its trade deficit?

Trump sees the trade deficit as one of the reasons for raising tariffs, but the US trade deficit is still expanding under high tariffs. Although the trade deficit with China has been reduced by 20% compared with 2017, the overall deficit has still increased to 1.5 times that of 2017. The reason is the surge in imports from other regions.

The US trade deficit is expanding. Trade statistics released by the US Department of Commerce on February 5 showed that the trade deficit in goods trade in 2024 will reach 1.2117 trillion US dollars, setting a new record. US President Trump sees the trade deficit as a problem and uses it as one of the reasons for raising tariffs.

The second Trump administration proposed a policy of imposing a 25% tariff on Canada and Mexico, and started to impose a 10% tariff on China from the 4th. However, it is still difficult to determine whether raising tariffs can help the United States reduce its trade deficit.

The United States successively raised tariffs on steel and Chinese products in 2018-2019, when Trump first took office. Data from the Peterson Institute for International Economics in the United States show that the actual effective tariff rate on Chinese products has risen from 3.1% in early 2018 to 21% in September 2019. The Biden administration initially advocated reducing tariffs on China, but it ended up maintaining almost all of them. The US government’s tariff revenue in 2024 reached $82.9 billion, an increase of 2.2 times compared with 2017.

The US trade deficit with China, which is the target of tariff increases, in 2024 is $295.4 billion. By country and region, although the deficit with China is still the largest, it has been reduced by 20% compared with 2017. In terms of US imports, China was surpassed by Mexico in 2023, falling from the top for the first time in 17 years.

Despite this, the overall US trade deficit has increased to 1.5 times that of 2017 due to a surge in imports from other regions. The US trade deficit with the European Union (EU) increased by 1.5 times to $235.5 billion, and with Mexico increased by 2.3 times to $171.8 billion. Imports from Vietnam and other countries have also increased.

In addition to the growth of the US economy, imports from countries other than China are also believed to be increasing. Joseph Briggs, an economist at Goldman Sachs, estimates that it will reach $30 billion to $50 billion in 2023. In Mexico and other places, “nearshoring” is being promoted, where companies set up production bases near the United States.

Among the top countries and regions, the only trade deficit that did not increase was with Japan, which had a deficit of $68.4 billion, the same as in 2017. Japan increased imports of electronic computers and aircraft engine parts from the United States in 2024.

From January 2017 to December 2024, the number of jobs in the US manufacturing industry increased by only 4%. The proportion of overall employment excluding the agricultural sector fell to 8.1%, a decrease of 0.4 percentage points. Trump tried to promote the return of industries to the United States through tariffs, but it is difficult to say that sufficient results have been achieved.

The Trump administration is also preparing to respond to this trend by further raising tariffs. In addition to saying that it will impose tariffs on the European Union, it also proposed to impose global general tariffs.

However, for the US economy, tariffs that are not limited to target countries and categories will become a double-edged sword that will lead to increased costs. When Trump claimed to impose a 25% tariff on Canadian products, Republican senators from the ruling party in the United States sounded the alarm, saying that a lot of potash, which is a fertilizer for agricultural products, relies on Canadian production, and there will be chaos on the agricultural front.

In the United States, the “Rust Belt” where manufacturing is concentrated is an important swing state in the presidential election and mid-term elections, and supporters tend to lean towards the side that attaches importance to easy-to-understand support policies for workers. Trump called the trade deficit a “subsidy” to trading partners, and did not change his stance of resolving it through tariffs.

Source: Nikkei