As of this writing, President Trump has implemented record high tariffs across numerous countries. The stock market responded by dropping by 10% within two days. This has pushed the market 15% below its peak in February 2025, resulting in the loss of trillions in shareholder value.
This might be worth it if the trade deficit was a cause for concern – but it is not. The trade deficit is a meaningless concept. The trade deficit only focuses on one thing traded, namely goods. Many more things besides goods are traded internationally, such as services, financial instruments and real assets. When someone buys a good from a foreign country, they must pay for it by selling one of these things. For instance, suppose I buy a BMW vehicle made in Germany and pay for it with dollars. The German company can only use these dollars to buy something priced in dollars, such as an American-produced good or service, a financial asset like a bond, or a real asset such as real estate. Thus, trade is balanced. If it was not, that means someone got something for free.
Focusing on the trade deficit only focuses on the trade in goods, ignoring everything else that is traded internationally. This is like saying that you run a trade deficit with the grocery store since when you buy goods from them, you pay for them using dollars (a financial asset) instead of other goods.
Focusing on the trade deficit only focuses on the trade in goods, ignoring everything else that is traded internationally.
Beyond misconceptions about trade balances, many also falsely link trade to the decline of manufacturing jobs. In the U.S. economy, the share of manufacturing employment to total employment has steadily fallen since the end of World War II. There is no speed-up in this trend following NAFTA taking effect on January 1, 1994 or China being granted permanent Most Favored Nation (MFN) status in 2000. MFN status is misleading. All it means is that China is assessed the same tariffs as every other country. China had been granted MFN on an annual basis since 1980; permanent MFN status simply prevented this from having to be renewed annually.
The decline in manufacturing employment is due to increased productivity in that sector. If you walk through a modern auto factory, you will see tasks that took dozens of people to do in the 1960s being done by a robot and computer. Tariffs will not change this fact. No matter what tariffs are, manufacturing will never be the source of employment that it once was due to automation.
The decline of the Big 3 automotive companies cannot be traced to “unfair” trade, NAFTA or China. Big 3 market share began declining in the mid-1970s due to the two oil shocks and quality problems. These allowed foreign competitors to get a foothold in the U.S. auto market. Given that so many foreign cars are produced in the U.S., tariffs will not allow the Big 3 to regain these losses. Instead, all tariffs will do is create significant economic damage.
