When people talk about America’s trade deficit, tariffs often come up as the “solution.” Put a tax on imports, make them more expensive, and the deficit will shrink, right? The problem is that tariffs do not actually fix the underlying imbalance. They just shift trade patterns, raise consumer costs, and invite retaliation.

The deeper reason the U.S. runs such persistent trade deficits is its habit of borrowing heavily. Here is how the cycle works:

1. The U.S. government runs budget deficits and issues lots of Treasuries.
2. Foreign investors, companies, and central banks buy those Treasuries, sending capital into the U.S.
3. This extra demand for dollars pushes the dollar up in value.
4. A strong dollar makes imports cheaper and exports less competitive.
5. The result is a larger trade deficit.

In other words, America’s borrowing habit and its trade deficit are two sides of the same coin.

If the U.S. reduced its borrowing, capital inflows would ease, the dollar would weaken, and the trade deficit would naturally shrink. Exports would rise and imports would fall, without tariffs, trade wars, or artificial distortions.

That is why many economists argue that reducing borrowing is far better than raising tariffs. It works with global market forces rather than against them. Tariffs can protect certain industries in the short run, but they do not touch the root cause. Borrowing less does.

Of course, the catch is political. Borrowing less means either cutting government spending or raising taxes, both of which are unpopular. Tariffs, on the other hand, are easy to sell as “protecting American jobs.” But if we are serious about addressing the trade deficit, the smarter path is to look at the borrowing side, not just the border.

macroeconomics

The U.S. Trade Deficit: Tariffs vs. Borrowing Less