An excellent primer on how interconnected the deficit and trade are, and how Trump and the Congress are planning to make it worse.  T

The Washington Post
Opinion

Trump’s tariffs were rash. But the reckoning was inevitable.

And delaying that reckoning will only make things worse.

April 11, 2025

By Steven Pearlstein

Steven Pearlstein, the Robinson professor of public and international affairs at George Mason University, is a former Post business and economics columnist.

President Donald Trump is right about one thing: The biggest imbalance in the global economy for the past 30 years has been the large, persistent “trade” deficit that the United States has run with the rest of the world.

The nature of this imbalance is not as simple as saying that we import way more than we export. Rather, it reflects myriad interconnected, self-reinforcing realities.

As a country, we live beyond our means, consuming more than we produce and investing more than we save.

Our currency is overvalued, making the things we import artificially cheap and the things we export artificially expensive.

The demand for — and thus the pay of — the lower-skilled and less-educated workers who once produced the goods we now import has fallen relative to higher-skilled and more-educated workers who produce the goods we export.

Despite being the world’s richest country, we are also its largest borrower, with the rest of the world eager to lend us our dollars back at low rates.

Because of those artificially low rates, the prices of assets that Americans buy with borrowed money — real estate, stocks, cryptocurrency — are artificially high, boosting the paper wealth of those who own them while putting them beyond the reach of many who don’t.

Living beyond our means with an economy at full employment also requires us to import more workers to provide the services that there aren’t enough Americans willing or able to provide.

These arrangements — the flows of goods, capital and people, the mispricings, the misallocation of labor and capital, the widening inequality — are all of a piece, creating a self-reinforcing dynamic that blurs the difference between cause and effect. Entire industries have developed around them, along with national, regional and household economies. Our political and economic expectations are shaped by them.

For us and our trading partners, this imbalance was a mutually beneficial arrangement — or so it seemed. With access to American capital, technology and markets, billions of people were lifted out of poverty while the United States, in terms of productivity, wealth and income, widened its lead over other advanced economies.

It was also unsustainable. At some point, we inevitably would run up so much debt that the cost of servicing it would diminish our standard of living and prompt the rest of the world to question whether it should continue to lend us so much at such favorable rates. The likely consequence would be a financial crisis marked by a global sell-off of Treasury bonds, a rout on the stock market and a decline in the dollar, leading to a global recession and years of stagflation here at home. We got a preview of some of that in recent days in the markets’ wild gyrations in response to Trump’s on-again, off-again tariffs.

Just as important, the situation was politically unsustainable. The growing disparity between the winners and losers was, at some point, bound to spark a populist revolt by the losers demanding a new set of economic arrangements more favorable to them. Trump’s political genius has been to give voice to those resentments.

Understand: Nobody consciously set out to create this massive macroeconomic imbalance. Rather, it was the result of millions of rational, if sometimes misguided, economic and political decisions by individuals, companies and governments. And though there were visible signs along the way that the arrangements could not last forever, as long as they were working well enough, nobody was willing to accept the losses and dislocation associated with correcting them.

So here we are. No matter how the Trump tariff wars eventually play out, the economic and geopolitical arrangements that had developed around these imbalances have been shattered. What we thought to be fixed and true is revealed to be fragile and ephemeral. A period of volatility, uncertainty and painful adjustment is sure to follow.

To be clear: As originally designed, Trump’s “reciprocal” tariff regime was stupid for many reasons.

Stupid because it serves no purpose to put tariffs on goods that we cannot produce, such as bananas, coffee, vanilla, and winter fruits and vegetables, or goods that a high-wage company should not produce, such as inexpensive clothing, toys, sneakers, TVs and other household appliances. Such tariffs simply raise prices for consumers with no benefits to workers. Stupid because many of the goods subject to tariffs are inputs to goods and services produced by highly paid American workers and sold around the world by hugely profitable American companies.

Stupid because achieving a better overall trade balance, which is what matters economically, doesn’t require achieving balance with every country.

Stupid because, with the economy at or near full employment, there’s no sense in using tariffs to “create” more jobs.

Stupid because imports from poorer, developing countries are economically insignificant to the United States.

Stupid because the inevitable retaliation from other countries will reduce the high-wage jobs of our export industries in the vague hope of re-creating lower-wage jobs in industries constrained by import competition.

That doesn’t mean we couldn’t benefit from raising tariffs on some imports until major trading partners lowered tariff and nontariff barriers to American goods or stopped subsidizing their exports. The dogmatic free traders were always wrong about that.

But tariffs are unlikely to alter the fundamental reality that, as a country, we collectively buy and invest more than we produce and save, which in broad terms is what the trade deficit represents. A simpler and more effective way to reduce that roughly $1 trillion annual trade deficit would be to reduce our government’s $2 trillion annual budget deficit. Unfortunately, Trump is determined to do the opposite. For just as his new tariffs were unveiled, the president and his Republican allies in Congress were pushing through a budget plan to extend and expand tax cuts, increasing future budget deficits by hundreds of billions of dollars each year.

Put another way, by refusing to tax ourselves to pay for all the government services we demand — and borrowing the difference from the rest of the world — we are effectively giving households and businesses the money to buy more of the imports that the president is so determined to reduce.

For the past 50 years, America’s economic fantasy has been that another round of tax cuts or public investments will magically allow us to produce our way out of outsize budget and trade deficits. Instead, the twin deficits rose in tandem. In the real world, the only way to bring things back into balance is to begin living within our means and accept the painful adjustments that it entails. As we learned this week, there are better and worse ways to go about that rebalancing. But delaying the reckoning will only make things worse.