Trump Was Always Wrong About the Trade Deficit

National Review Online

Friday, February 20, 2026

 

Talk about bad timing. On Wednesday, President Trump boasted on social media that the U.S. trade deficit had been reduced by 78 percent thanks to his comprehensive tariff regime, a claim apparently based on his cherry-picking of data between October and January. Less than twelve hours later, the Census Bureau published its annual trade report. It reveals that the U.S. trade deficit declined by just 0.2 percent in 2025 — a far cry from Trump’s figure — from $903.5 billion in 2024 to $901.5 billion last year.

 

The numbers beneath the headline are even worse for the president’s faulty narrative. The deficit in goods, which are all that tariffs apply to, hit a record high in 2025. Specifically, Americans purchased $1.2 trillion more in merchandise from foreign countries than they sold abroad. Imports were the highest on record at $4.3 trillion, as were imports of only goods at $3.4 trillion.

 

The only reason that the overall trade deficit did not widen was that the U.S. economy also saw record-high exports of both goods and services. America runs a consistent surplus in services, now worth $340 billion, which protectionists tend to ignore. Altogether, there is little evidence in the census statistics that trade was disrupted much at all in the past twelve months.

 

That is despite Trump’s best efforts. The president has been obsessed with the trade deficit for decades, driven by the erroneous conviction that it represents money lost to other countries. In reality, the balance of trade has no bearing on a country’s economic prosperity. The United States is one of the wealthiest countries in the world per capita, and it also runs the largest trade deficit. Several countries that are desperately poor, such as Libya and Papua New Guinea, run trade surpluses.

 

When the U.S. trade deficit declines, it’s typically because Americans have gotten poorer and can therefore afford to purchase fewer goods and services, which include imports. The year that the deficit shrank the most in recent memory was 2009, when the nation was in the throes of a financial crisis and a recession. During the Great Depression, the United States had a surplus in nine out of ten years.

 

Tariffs, on the other hand, have proven unable to meaningfully shift the full balance of trade. President Trump imposed a suite of sweeping duties last year, resulting in an average pre-substitution rate of 14.5 percent across all imported goods. Previously, the average rate hovered around 2.5 percent. Yet while this stunning increase has mangled trade in certain products and with particular countries, it has hardly put a dent in the deficit.

 

Economists anticipated just this outcome at the beginning of 2025, before Trump’s levies even took effect. They recognized that tariffs can be effective at changing the composition of international trade, but not its total volume. That is because trade balances are largely determined by macroeconomic factors that are impossible for governments to control, such as countries’ fundamental competitive advantages in various industries. When tariffs get in the way of mutually beneficial transactions, the value of currencies typically adjusts to make them worthwhile again.

 

The greatest factor determining trade deficits is the value of investment flowing in and out of the United States. Over a long enough period, net investment flows are always the perfect inverse of net trade flows, since every dollar sent abroad in an import or financial outflow will eventually return to America through either an export or a financial inflow. Because U.S. markets are so attractive relative to the rest of the world, foreigners purchase around $1 trillion more of U.S. equities and credit than Americans buy from other countries. For the trade deficit to shrink, this investment surplus would need to shrink in equal measure.

 

Trump claims that he can simultaneously reduce the trade deficit and attract trillions of dollars more in foreign investment, but that is an economic fantasy. The nation’s trade deficit continues apace because Americans are rich enough to demand lots of imported goods, and because our financial markets are desirable enough to attract far more capital to our shores than they lose. As the latest census data have shown, none of Trump’s tariffs can change that.