Trump’s tariffs get stymied by big federal deficits

OPINION:

President Trump’s tariffs aren’t working as advertised.

Taxes on imports can’t shrink the trade deficit, significantly boost U.S. manufacturing or improve the lot of most ordinary Americans.

At the macro level, Americans are not a nation of savers. Household savings as a share of personal disposable income are hovering around 5%.

Savings fluctuate month to month depending on the challenges households face in labor markets. These markets determine employment and wages and the inflation people must navigate to meet basic needs and afford some luxuries such as vacations and entertainment.

Putting aside hypersaving during the COVID-19 shutdown, when Americans couldn’t get out to enjoy many leisure pursuits, the savings rate has trended downward from recent peaks of 17.5% in May 1975 and 7.5% just before the pandemic.

This is importantly motivated by the K-shaped economy.

Overall, incomes from wages and personal investments in stocks, bonds and real estate have been growing slowly for lower- and middle-class workers — especially those in the 40th, 50th and 60th percentiles — while advancing rapidly for wealthier Americans.

Tariffs raise prices and burden folks at the bottom the most.

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U.S. businesses also save and return a portion of their earnings to households through stock buybacks and dividends. When business prospects are good, they use savings to finance more factories, software, research and development, new stores, warehouses and rental real estate.

Domestic household and business savings are needed to finance those business investments, the construction of owner-occupied housing and government deficits.

Historically, the pool of domestic savings has been inadequate to meet those needs, and Americans have turned to international capital markets to help finance business expansion, housing and Washington’s overspending.

The federal deficit as a share of gross domestic product increased from 2.4% in 2015 to 5.8% last year. The huge sums now flowing into data centers and the development of artificial intelligence further tax the pool of domestic savings.

International capital inflows include the sale of U.S. Treasury securities, corporate debt, shares in U.S. companies and real assets to foreign investors: private businesses, individuals, governments and central banks.

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The proceeds enable Americans to consume more than they produce through imports that exceed exports.

As the federal deficit has increased over the past decade, the current account balance, which includes goods and services and is the broadest measure of the trade deficit, increased from about 2.6% of GDP to about 3.8%.

White House economists Kevin Hassett, Peter Navarro and, until he joined the Federal Reserve, Stephen Miran have Ph.D.s in economics from Harvard and the University of Pennsylvania. Earning such credentials requires a mastery of these very fundamentals.

Either they have failed to inform the president, or he simply thinks economics, such as vaccine science, is superstition.

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President Trump’s reckless charge that the Supreme Court justices who voted against him in the recent tariff decision have been purchased by foreign interests indicates that anything is possible to explain this cognitive dissonance.

The inconvenient truth is that if we want a smaller trade deficit, then federal spending must be dramatically curtailed or taxes significantly raised.

Boosting U.S. tariffs on imports from about 2.3% in 2024 to about 13% with recent adjustments can reallocate the U.S. trade imbalance among other nations.

China’s share has slipped as it has borne higher tariffs than its trading partners and secured other export markets.

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For one thing, the tariffs are poorly structured. Higher rates on steel and aluminum than on finished products such as cars, buses and parts advantage imports over domestic manufacturing.

Efforts to circumvent this logic through exemptions and ever-changing tariff rates only make business planning terribly difficult and discourage investment.

For another, the uncertainty about the durability of the 10% across-the-board tariffs, ongoing investigations into the unfair trading practices of foreign governments and imports that may pose a threat to national security appear to be freezing investment decisions throughout the economy.

We see it in the data.

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From the fourth quarter of 2024 to the fourth quarter last year, nonresidential fixed investment was up more than $195 billion. Computer processing equipment, software and R&D appear to have accounted for most of it.

These were strongly driven by investments in AI, which are not much advantaged by the tariffs. Crucially, sales of AI agents are classified as services, leaving them untouched by tariffs that apply only to physical goods.

Essentially, investments in AI were up broadly, while in the rest of the economy, including manufacturing, they were neutral.

New factory construction fell in 2025, as did manufacturing employment.

Moreover, our principal competitors — Germany, Japan, South Korea, Taiwan and emerging economies such as Malaysia and Vietnam — have responded to the industrial and tariff policies of Presidents Biden and Trump with government programs to boost their own domestic industries.

The only way Washington can realistically assist domestic manufacturing is to force a downward adjustment in the trade deficit by reducing federal spending or raising taxes.

• Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.