Tariffs and deficits
while protected industries did receive marginal gains, input costs increase, and retaliatory tariffs caused ‘a net decrease in manufacturing employment of around 2.7%’. Tariffs increased costs for downstream producers, such as U.S. automakers using imported steel, and the reduction in export opportunities for farmers facing Chinese tariffs. Fiscal deficits did initially boost aggregate demand, which lowered unemployment. However, this effect was partly offset by leakages into imports and by the stronger dollar making goods less competitive. Over time, the inflationary pressures from tariffs and fiscal stimulus led to quantitative tightening, reducing both investment and unemployment. As Bellocchi and Travaglini warn, ‘tariffs fuel inflation and higher interest rates, which may reduce investment, consumption and employment’ (Bellocchi & Travaglini, 2025, p. 232). Therefore, whilst employment benefitted shortly, the combined effects of tariffs and deficits was negative for jobs in the U.S. economy, which experienced sectoral dislocation rather than broad-based job creation. Analytical considerations and policy implications Supporters of tariffs may argue that they protect domestic industries that suffer unfair competition globally, while fiscal deficits can stimulate growth. However, it stands that such short-term gains are often outweighed by the long-term costs. As Reis (2013, p. 113) showed in his analysis of Portugal, unsustainable deficits and structural imbalances ultimately led to sharp adjustments and painful economic contractions. For the U.S., the reliance of fiscal borrowing and the shift towards protectionism highlight similar vulnerabilities if global capital inflows decrease. The majority of economists advocate for alternative policies, such as fiscal consolidation to raise public saving, structural reforms to boost productivity and the flexibility of the exchange-rate to ensure global competitiveness. Joshi and Vines (2025, p. 4) argue that ‘the starting point for reducing the U.S. trade deficit should have been fiscal discipline, not tariffs’. Similarly, the IMF (2023, p. 39) recommend a gradual reduction in deficit, as well as investment in competitiveness-enhancing reforms. Conclusion The U.S. demonstrates that the use of tariffs to shrink bilateral trade deficits, while simultaneously running large fiscal deficits, is counterproductive. Tariffs alter trade flows but fail to address the fundamental saving-investment gap, while fiscal deficits reduce public saving, ensuring persistent current-account deficits. When used in unison, they appreciate the currency, harming competitiveness of exports, while there promised improvements to domestic employment are often unfulfilled. As Krugman and Obstfeld (2018, p. 115) remind us, trade imbalances are a result of macroeconomic phenomena caused by structural patterns in saving and investment, not bilateral politics. The lesson is clear: a sustainable external trade balance requires both fiscal responsibility and structural competitiveness, not protectionism. References Altenberg, P. (2025) ‘Tariffs do not improve the trade balance’, Kommerskollegium at https://www.kommerskollegium.se/globalassets/publikationer/rapporter/2025/tariffs-do- not-improve-the-trade-balance.pdf. Bellocchi, A. and Travaglini, G. (2025) ‘The trade deficit delusion: Why tariffs will not make America great again’, Intereconomics 60.4: 227–234 International Monetary Fund (2023) External Sector Report . Washington, DC: International Monetary Fund
26
Made with FlippingBook - PDF hosting