Trump quickly responded to news that ships from China are no longer delivering goods to the US: “We were losing hundreds of billions of dollars with China. Now, we’re essentially not doing business with China. Therefore, we’re saving hundreds of billions of dollars. It’s very simple.”

Why Trump is wrong

No, it’s not so simple. Trump wants us to believe that if we decrease imports, everything else that factors into our economic wellbeing will stay the same. After all, he’d argue, the definition of Gross Domestic Product (GDP, which measures a country’s output) shows imports as a subtraction. We measure GDP as the sum of:

• Direct government expenditures (excludes transfer payments and interest on the debt. It’s federal personnel and purchases of goods like weapons)
• Domestic Consumption, which equals total Consumption minus the Consumption of goods and services we import
• Domestic Investment, which equals total Investment minus the investment goods and services we import
• Exports to other countries of goods and services produced here

GDP = Government + Consumption + Investment + (Exports – Imports)

Since the late 1970s, the US has continuously run a trade deficit, i.e., exports minus imports is negative.[1]Reduce imports, Trump has us think, GDP magically increases.

Had Trump mastered the economics classes required to earn his degree from the University of Pennsylvania’s Warton School of Business, he would have remembered the equation for the saving-investment balance:

(National Savings) – (National Investment) = Exports – Imports

This equation is not a theorem or a hope; it’s a truth that falls out of our national income accounts, just like the change in your company’s cash balance falls out of your P&L statement. We are very wealthy as a nation. We have voracious consumers with low savings rates and an undisciplined Congress that likes to spend and not tax. As a result, we run a savings deficit and that creates a trade deficit.

Why it matters

It’s a national luxury to hold these imbalances. First, we have lower costs by importing from countries that can make things cheaper than we can. Second, our interest rates are lower that they would be otherwise because people outside our country choose to fund our investments and buy our government bonds. Why? They have historically seen safer and better investment opportunities here.

SIDEBAR: I am not saying there are no adverse consequences from our trade situation. The movement of manufacturing—first, from the north of the US to the South, and then from the South to Asia in pursuit of higher profits—cost people their jobs. But ongoing automation was as much to blame for job losses—as we saw in agriculture decades earlier.[2] And having a trade surplus is no guarantee of manufacturing retention, as France experienced when it lost manufacturing jobs despite its trade surpluses. Job loss is a political, not an economic, issue – our nation chose to accept wealth generation from trade and use little of it to help those displaced.

What will really happen

Let’s look at why Trump’s attempt to “stop losing money (i.e., GDP) on trade” will fail. He assumes we’ll import less, since goods with tariff taxes will be more costly. Two things are wrong with this assumption. In 2022, only 33 % of imports were for consumption of goods and beverages. Most imports were for businesses’ capital goods, supplies, and materials. Trump’s tariffs will make our businesses less competitive, reducing exports. On top of that, other nations will impose retaliatory tariffs on us, hurting exports as well. Trump is also slashing spending on research, which created the products and services that drive our exports.

Second, he will significantly increase our deficit as his planned tax cuts far exceed his proposed spending cuts (Link to my earlier blog). With the left side of the saving-investment equation becoming more negative, what will give? We will need to issue more bonds, which will drive up our interest rates. Higher interest rates attract foreign capital, increasing demand for dollars and the value of our dollar. Imports will increase, and exports will decrease with a higher valued dollar.

The bottom line? Trump’s increased tariffs will not achieve his goal. A larger government deficit will create a large trade deficit. Proof point? The tariffs he imposed in his first term reduced real incomes and did not improve the trade deficit.[3]

The larger problem about which Trump is silent

A larger economic issue is Trump’s dramatic increase in the deficit and our debt. Currently, our deficit is 6% of GDP; the discussed budget plan will raise it to 8-9%. This will kick off a negative spiral: Higher debt in the US will reduce confidence in our bonds. Already our credit rating has fallen. People will sell the bonds they hold, which will lower bond prices, which equates to a higher interest rate. When the US issues more bonds to finance our deficit, we’ll have to do it so at a higher interest rate. Usually, this would increase the value of the dollar. However, in the first three-plus months of Trump’s second term, less desire to hold US dollars due to risk has already led to a significant fall in the dollar’s value. The combined changes – higher interest rates and a weakened dollar – scared the Trump administration enough that they imposed a temporary halt to the high tariffs he advised. Still, tariffs are higher than usual at 10% (higher for China).

Economists have long argued that the US dollar’s share of reserve currencies would fall over time, eroding our interest rate advantage. Crypto, Euro, and Yuan will gain share, just as the Pound lost share in the past. But in just three months, Trump has set in motion a decline in US financial dominance that would otherwise have taken decades.

Inexcusable. Or, as the Wall Street Journal states, the most stupid mistake a US President can make.

[1]  https://www.macrotrends.net/global-metrics/countries/USA/united-states/trade-balance-deficit

[2] https://www.nytimes.com/2025/05/02/opinion/ezra-klein-podcast-kenneth-rogoff.html?smid=nytcore-ios-share&referringSource=articleShare

[3] https://en.wikipedia.org/wiki/Tariffs_in_the_first_Trump_administration