National Review Online
Thursday, April 03, 2025
Believing that a country is in bad shape if it imports more goods than it exports — i.e., if it has a trade deficit — is, in most cases, a harmless error in reasoning. It’s the sort of thing that seems to make sense at first glance, but any halfway decent economics professor can train it out of students in one or two lectures.
That error in reasoning becomes harmful when the person who believes it is the president of the United States, and he is willing to claim emergency powers to act on it unilaterally. That’s what Donald Trump has done with his executive order to raise tariffs on virtually every country on earth.
As a share of the economy, the executive order is likely the largest peacetime tax increase in U.S. history. In nominal terms, it’s the largest tax increase, period. And it comes without any input from Congress. In fact, it effectively overturns USMCA, CAFTA-DR, and the twelve bilateral free trade agreements that Congress has approved. On Tuesday morning, the Dow Jones Industrial Average opened down over 1,100 points, or about 2.6 percent, in reaction to the news, while the tech-heavy Nasdaq collapsed around 800 points, or 4.6 percent.
Trump claims extraordinary powers to impose these tariffs on the basis that the trade deficit is a national emergency. He claims to be helping U.S. manufacturing firms, but groups such as the National Association of Manufacturers oppose the tariffs, probably because about half of U.S. imports are inputs for domestic production.
Even Joe Biden, under intense pressure from his progressive supporters, did not declare a national emergency for climate change. There’s about as much evidence that climate change is a national emergency as there is that the trade deficit is one, so expect the next Democratic president to waltz right through the door that Trump has opened.
Speaking of old, wrong Democrats, Dick Gephardt in his wildest dreams probably never imagined the protectionist spree that Trump has wrought. The White House claims to have calculated the “tariffs charged to the U.S.A. including currency manipulation and trade barriers” for nearly every country.
These numbers are far in excess of the tariffs that countries impose on U.S. goods — because the formula used to calculate them has nothing to do with tariffs. Instead, it is the trade deficit divided by the amount of imports. The tariffs levied are either 10 percent or half of that trade deficit ratio, whichever is higher. If the U.S. has a trade surplus with a country (and the U.S. has a trade surplus with over 100 countries), it is set at 10 percent automatically.
In effect, it’s a 10 percent minimum tariff for all imports, with many top U.S. trade partners facing much higher rates. There’s no consideration given to alliances. Taiwanese goods are taxed at 32 percent, South Korean goods at 25 percent, and Japanese goods at 24 percent. Venezuelan goods, on the other hand, are only taxed at 15 percent, and Iranian goods face the bare-minimum 10 percent. The U.S. has a trade surplus with Iran, in large part because they face economic sanctions due to their malign behavior, and so we do very little business with them.
Take a country like Costa Rica, for example. The U.S. goods trade deficit with Costa Rica accounts for less than 0.2 percent of the total U.S. goods trade deficit, so even if you think trade deficits are bad, it’s basically irrelevant. Some of the top imports from Costa Rica include products such as bananas and coffee, which are hardly grown at all in the U.S. because of geography. But now, because of Trump, Americans will be taxed at 10 percent for buying Costa Rican bananas and coffee.
Perhaps most galling is the 17 percent tax rate levied on Israeli goods. Israel is party to the longest-running U.S. bilateral free trade agreement, in effect since 1985. There were almost no Israeli tariffs on U.S. goods to begin with, but as a gesture of goodwill earlier this week, the Knesset abolished the few remaining tariffs. The truly “reciprocal” response would have been for the U.S. to eliminate all tariffs on Israeli goods, but Trump’s policy was never about reciprocity; it was about his sincere and mistaken belief that tariffs are good.
If trade deficits were inherently bad, we’d expect poor countries to have trade deficits and rich countries to have trade surpluses. In the real world, there’s basically no relationship, which is why economists don’t pay much attention to it. The United Kingdom, Japan, Egypt, and Uganda have trade deficits; Australia, the Netherlands, Russia, and Angola have trade surpluses.
Even if it were true that the trade deficit is bad, higher tariffs won’t necessarily reduce it. They reduce the amount of imports, but they also reduce the amount of exports, as companies shift their focus from abroad to the protected home market. The order says that if the trade deficit isn’t reduced, the president can continue to raise tariffs until he is satisfied. No specific target is named.
The last thing that worked to substantially reduce the U.S. trade deficit was the Great Recession, because a bunch of people lost their jobs and couldn’t afford to buy as much stuff as normal. You probably remember that as a bad time, but if trade deficits are truly national-emergency-level terrible, then the 2009 reduction in the trade deficit should have been great news.
Trump likes to frame his trade policy as “commonsense.” To treat allies worse than enemies and raise taxes on consumers and businesses at a time when the cost of living is a major concern is anything but commonsense. Trump’s mistaken beliefs about trade have been a constant since the 1980s, but now they have been combined with an enormous grant of power, and Americans will pay the price.
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