Waiting for the Trade Deficit to Go Away | American Enterprise Institute
Albert Einstein famously said that a sign of insanity was doing the same thing over again and expecting a different result. We must wonder what he might have made of Trump’s repeated pursuit of an aggressive import policy combined with an expansive budget policy in the hope of eliminating the trade deficit. Despite that policy combination singularly failing to reduce the trade deficit during his first term, Trump continues to hew to these policies in his second term. He does so even though in the first year and a half of his second term, the results of reducing the trade deficit remain underwhelming.
The two signature economic policies during Trump’s first term were protectionism abroad and tax cuts at home. Import tariffs were imposed on hundreds of billions of dollars of Chinese goods, a 25 percent tariff was imposed on steel products, and a trade agreement was renegotiated with Canada and Mexico. At the same time, the 2017 Tax Cuts and Jobs Actcut the corporate tax rate from 35 percent to 21 percent, reduced individual tax rates, increased the standard deduction, and expanded the child tax credit. Those tax cuts helped widen the budget deficit from 3.2 percent of GDP in 2016 to 4.6 percent in 2019, even before the budget deficit blew out during the 2020 COVID-induced economic recession.
It would be an understatement to say that Trump’s first-term economic policies did not produce the desired result of getting the country on the path to trade-deficit elimination. Far from decreasing, the trade deficit on goods and services increased from around $500 billion in 2016 to $575 billion in 2019 before blowing out to $680 billion in 2020 because of the COVID pandemic. On the positive side, Trump’s policies did succeed in increasing manufacturing employment by around 400,000 jobs between 2016 and 2019 before manufacturing employment plunged during the 2020 COVID-induced recession.
Undaunted by the failure of his economic policies during his first term to make a dent in the trade deficit, in his second term Trump is pursuing the same economic policy combination of protectionism abroad and tax cuts at home. However, this time he is pursuing that combination on steroids. In a rather chaotic manner that has induced a high degree of investor uncertainty, import tariffs have been raised to their highest level in the past 100 years. At the same time, Trump’s One Big Beautiful Bill Act cut taxes by an estimated $5 trillion over the next decade. That has contributed to an increase in the budget deficit to around 6 percent. The Congressional Budget Office is projecting that based on present policies, the budget deficit will exceed 6 percent of GDP as far as the eye can see.
If the objective of import tariffs was to eliminate the trade deficit, the results to date have been disappointing. In 2025, the trade deficit on goods and services amounted to $900 billion, virtually unchanged from the previous year. Meanwhile, in the first seven months of 2026, the trade deficit has been running at an annualized rate of $840 billion. More disappointing yet is the fact that far from increasing as was intended, manufacturing jobs in the first 18 months of the second Trump administration have declined by 70,000. And this occurred despite a boom in artificial intelligence investment spending.
By now, one would have thought that the Trump administration would have understood that hiking import tariffs alone will not eliminate the trade deficit. Rather, for that to be done, our overall spending on consumption and investment would need to be brought more in line with what we produce. For that to occur, serious efforts will need to be made to reduce our gaping budget deficit. If we continue to spend more than we produce, we will have a trade deficit, irrespective of how high an import tariff wall we erect.
Unfortunately, there is no sign that anything serious will be done to reign in the budget deficit. Indeed, there is the real risk that the need for increased defense spending in the wake of the Iran war will further increase our already sky-high budget deficit. For this reason, I would not suggest holding your breath for any meaningful reduction in the trade deficit.
