Author: Davit Shatakishvili
The growing trade deficit in the U.S. is a critical issue in domestic economic policy, sparking considerable debate and differing viewpoints. The use of tariffs by the U.S., along with the threat of a tarrif war, serves various economic and political objectives, which can change depending on the administration in power. Both the Trump and Biden administrations imposed tariffs and trade barriers against China, albeit with different objectives and strategies. One of the main goals behind the Trump administration’s new sanctions on China was to reduce the U.S. trade deficit. It is worth exploring the key factors behind America’s growing trade deficit, the dynamics of the trade war between the U.S. and China, and the potential impact of tariffs on reducing the deficit.
Why is the U.S. Trade Deficit Growing?
Over the past 25 years, the United States has consistently maintained a negative trade balance, reaching a record-high deficit of $920 billion last year. In January 2025 alone, the U.S. trade deficit stood at $131.1 billion, marking another all-time high. President Trump has stated that restoring fair trade relations through tariffs is one of his top priorities. However, there is considerable debate over the effectiveness of tariffs in reducing the trade deficit.
In 2018, during his first presidential term, Trump imposed tariffs on China while the U.S. trade deficit stood at $621 billion, $420 billion of which was with China. Meanwhile, China recorded a trade surplus of $352 billion during the same period. By 2024, the U.S. trade deficit had surged to $920 billion, including a $300 billion deficit with China, while China’s trade surplus reached a record-high $1 trillion. In 2024, the countries with the largest trade surpluses with the U.S. were: China ($295 billion), Mexico ($172 billion), Vietnam ($124 billion), Ireland ($87 billion), Germany ($85 billion), Taiwan ($74 billion), Japan ($69 billion), South Korea ($66 billion), Canada ($64 billion), and India ($46 billion). While there are numerous reasons behind the rising trade deficit, it is worth focusing on the key contributing factors.
One of the fundamental equations in macroeconomic theory states that the current account balance is the difference between a country’s total savings (including household, business, and government savings) and its investments. In the case of the United States, a significant gap in favor of investments over savings is one of the primary drivers of its trade deficit. This means the country spends more on investments than it saves, leading to a persistent imbalance. When investments exceed savings, a country needs to borrow more from abroad or attract foreign capital. This inflow of money, in turn, increases the ability to import goods, often strengthening the national currency, which further contributes to the trade deficit. On the other hand, if savings exceed investments, the country has the opportunity to export capital (for example, by acquiring foreign assets), which in turn depreciates the national currency due to capital outflows. This depreciation allows foreign buyers to purchase more goods for the same price, thereby boosting exports. As a result, reduced imports and increased exports give the country a higher trade surplus.
This is also reflected in World Bank statistics. In 2023, the ratio of total savings to GDP in the U.S. was 18.7%, while in China it was 44.4%, in Germany 25.7%, in Japan 24.6%, and in Canada 23.6%. Additionally, the International Monetary Fund (IMF) in one of its 2024 reports on the U.S. notes: “There is a need reconcile the saving-investment balance in the national accounts with the current account balance in the balance of payments, as the discrepancy has widened significantly.”
The U.S.-China Trade War 2.0 – Perspectives and Objectives of the Parties
President Trump, during his first term (2017-2021), viewed tariffs as a means to reduce the trade deficit. At that time, the tariffs he imposed on China aimed to bring Beijing to the negotiating table in order to reduce the trade surplus that China was holding over the U.S. This was the so-called “Phase One” agreement, which the parties signed in January 2020. According to the document, Beijing committed to increasing imports of American-made products, agricultural goods, energy resources, and various services from the U.S. to levels higher than those of 2017 by December 31, 2021. This was essentially a prerequisite for the reduction of tariffs imposed in 2018. China was able to circumvent some of these tariffs by exporting its goods to tariff-free countries, from where the products were then sent to the United States. Typically, this was done by falsifying the certificates of origin for the goods, which constitutes a serious violation of international trade rules. In such cases, the affected country has the right to demand compensation for damages incurred.
President Biden’s administration viewed the purpose of tariffs differently. From their perspective, maintaining high tariffs and implementing export controls on critical goods would help the U.S. retain its leadership in technological innovations. The goal of the Biden administration was to halt China’s growing technological capabilities through these measures.
Trump initiated a new phase of tariffs on February 1, 2025, imposing a 10% tariff on Chinese goods. In response, China’s State Tariff Commission imposed an additional 15% tariff on U.S. coal and liquefied natural gas imports, while also applying a 10% tariff on crude oil, agricultural machinery, and certain types of automobiles. Additionally, China’s Ministry of Commerce and the General Administration of Customs issued a statement announcing that they would impose export controls on 25 rare earth metal products, which are used in key technologies such as semiconductors and solar panels.
After Trump raised the tariffs on China to 20% in March of this year, Beijing responded by imposing tariffs ranging from 10% to 15% on American agricultural products, such as chicken, beef, pork, wheat, soybeans, and sorghum. They also added 15 more American companies to the export control list, and included 10 entities on the unreliable entities list.
In general, many American farmers depend on exporting their products to China, especially in the case of soybeans, corn, and sorghum production. It seems that, for China, it is much easier to replace imports from the U.S. with those from less hostile countries, such as Brazil and Argentina, than it is for the U.S. to find alternative markets for its goods. In this regard, China can further intensify pressure on American agriculture through new import restrictions, inspections, and additional tariffs. Moreover, it can expand the list by refusing certain genetically modified organisms (GMOs), which has already arisen as a contentious issue between the U.S. agricultural sector and China.
The Chinese government is also considering imposing export controls on critical minerals to the U.S.. As it controls about 60% of global production and 85% of processing capacities, finding alternatives in this area would be a particularly challenging task. By imposing export controls on vital minerals, China would gain significant leverage over the U.S.
To What Extent Can Tariffs Reduce the Trade Deficit?
According to Donald Trump, the main goal of tariffs is to increase the cost of imports, encouraging Americans to buy domestically produced goods at a relatively lower price, ultimately reducing demand for imports. In his view, tariffs will also help protect American production from foreign competitors and bring back American manufacturing operations from abroad, stimulating exports and reducing the trade deficit.
However, it should be noted that the imposition of tariffs, which increases the cost of imports, also raises the price of domestic production due to the increased cost of imported components necessary for production. As such, the notion that the price of domestic production remains unaffected by tariffs is incorrect.
The new tariffs imposed by Trump target specific countries, such as Mexico, Canada, and China, raising the cost of products from these countries in particular. However, this does not necessarily mean that American consumers will broadly reject imported goods, including those from other countries. In this context, a different perspective was offered by head of the U.S. Department of the Treasury, Scott Bessent, who suggested to Trump the implementation of a universal 2.5% tariff on imports from all countries, with the rate gradually increasing until the trade deficit is balanced.
At the same time, Trump is urging Saudi Arabia and Taiwan to make direct investments in the U.S., which, according to the formula discussed in the first part of the article, means more money to finance the deficit.
Tariffs can also strengthen the value of the dollar, contributing to an overall increase in the deficit. There are two main reasons for this: first, tariffs lead to inflation, which in turn prompts the Federal Reserve to maintain a high refinancing rate, prioritizing saving the dollar over spending it. Second, an overly strengthened dollar makes American products more expensive and less competitive on international markets, leading to a reduction in exports.
Thus, the record levels of the U.S. trade deficit and China’s trade surplus in 2024 are one of the main challenges for the Trump administration. Seeing this as a sign of American production’s reduced competitiveness in the global market, the U.S. has declared a particularly harsh trade war against China. Yet the retaliatory actions taken by China are no less painful for America: China’s moves on several economic fronts indicate that if the Trump administration continues to pressure Beijing without clear and consistent messages on how trade disputes can be resolved, China is prepared to take even harsher measures against the U.S., which would certainly not be in America’s best interests. Along with macroeconomic theories, the 2018 experience shows that the effectiveness of a tariff war in reducing the trade deficit is minimal, and, in many cases, it can even have the opposite effect. Therefore, making any kind of prediction is difficult at this point. However, a significant number of prominent American economists and investors consider the tariff war an ineffective approach, and given its negative effects, some of them even predict a worsening of the trade deficit.
