Tariffs Will Destroy the Best Cure for the Trade Deficit

Trump’s upcoming tariff barrage is supposed to reduce trade deficits by cutting out imports. Forgotten amid all the administration’s threats and justifications is the other side of the trade equation. More exports not only reduce deficits but also bring broader economic benefits through higher-paying jobs and greater innovation. Yet in a world of global supply chains, boosting exports means upping imports as well. Widespread tariff hikes will also hold back US-based exporters.

The US is not a big trader. Just a fourth of its economy comes from international exchanges, far behind other OECD countries, in which trade averages closer to two-thirds of total economic output. And unlike in most other nations, trade’s importance in the US economy has been falling in recent years.

Still, the US sells some $3 trillion a year worth of goods and services to the world, supporting roughly 10 million US jobs. It is a major commodity exporter, selling nearly $700 billion in oil, gas and coal as well as grains, soybeans, meat and more every year. It also sells more than a trillion dollars annually in high-end services abroad, including software, advertising, movies and airline flights that ferry tens of millions of global travelers.

International sales present big growth opportunities for US-based companies and workers. While US economic growth has recently outpaced other high-income countries and even many emerging economies, the US customer base is just 4% of the globe’s population. And the next billion newly minted middle class will live elsewhere — mostly in Asia. Whether growing food, building planes or creating online games, companies that cater only to the domestic market have a limited runway for future growth.

Moreover, export-oriented jobs, particularly those in manufacturing, tend to pay more. According to the US International Trade Commission, workers in export industries earn 16% more than their domestically-oriented counterparts. And export-oriented operations tend to create more job opportunities than domestically focused industries.

Despite the outsized economic benefits of exports, the US has been losing global market share: Its share of international sales in 2023 was less than 9%, down from 12% in 2000. Domestic costs and barriers are partly to blame. Despite a bounty of energy, for instance, prices are still high compared with industrial rivals China, Vietnam and Mexico. Wages, even when factoring in the higher productivity of US workers, outpace those of many competitors, as do US corporate tax rates. And for many industries, including mining, refining and chemical manufacturing, regulatory and other hurdles make it harder to set up shop.

Exporters also get little help from the US government, at least when compared with many other nations. Government loans and financing are often difficult to come by. Other forms of public support are spread piecemeal across more than a dozen agencies, a landscape that’s harder for companies, especially smaller ones, to navigate.

The US pullback from trade agreements is also leaving its exporters at a growing disadvantage. Many countries, including China, have signed a plethora of new free-trade agreements, including the Regional Comprehensive Economic Partnership, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, the African Continental Free Trade Agreement, the Pacific Agreement on Closer Economic Relations Plus, the Australia-United Kingdom Free Trade Agreement, and the EU-Vietnam Free Trade Agreement. Negotiations are continuing apace between the EU and India, South America, and Mexico. As these agreements come into force, exports between the partner nations will become relatively cheaper than with those nations, like the US, that remain outside the club.

Meanwhile competition, fair or not, has been undercutting US sales into once lucrative markets. Mexico remains one of the biggest destinations for US exports, buying some $370 billion in goods and services every year. Yet US makers have lost market share in footwear, clothing, sports equipment, cellphones, electronics, cables, motors, cars and more over the last twenty years.

To be competitive, US exporters of electronic parts, machinery, automobiles, pharmaceuticals and other goods need affordable inputs from abroad. No country today makes every piece, part or ingredient that goes into their products. Already more expensive steel and aluminum mean US-made engines, aircraft and household appliances will likely cost more than their Japanese, Chinese and German counterparts. The broader tariffs envisioned in President Donald Trump’s “Liberation Day” will cause more US-based sectors to lose more ground.

If that wasn’t bad enough, tariffs tend to beget retaliatory tariffs, further shrinking markets for aspiring US-based exporters. China has levied taxes on US energy, autos, tractors and many agricultural products. Europe has threatened mid-April retaliatory tariffs on steel, aluminum, whiskey, motorcycles and more. Canada and Mexico have largely held off so far, but they too will tax US goods if delayed tariffs go into effect.

The US maintains strong commercial advantages. Its trusted legal system, intellectual property protections, human talent, bounty of financing and thriving consumer market attract companies and investors from around the world. Indeed, the US has long been the biggest beneficiary of foreign direct investment.

But tariffs threaten these flows too. Yes, some companies will invest in the US to gain market access today. But they won’t be able to use US operations as a profitable base for global consumers or to reach the fastest-growing commercial markets. US companies will become less likely providers of raw materials, capital goods and intermediary inputs for other nations’ manufacturers. US makers will get cut out of global supply chains. And US consumers and workers at home will be left to subsist on a much smaller economic pie.