Tariffs and the Trade Deficit
June 28, 2025
https://www.rogerfarmer.com/rogerfarmerblog/2025/6/28/tariffs-and-the-trade-deficit
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Just my take on the post
Tariffs & the Trade Deficit: What Roger Farmer Gets Right—and Wrong
TL;DR
Tariffs are no silver bullet. They barely dent the trade gap, do little for factory jobs, and over-state China’s financial leverage. Fiscal discipline or a weaker dollar move the needle far more.
Where the Post Hits the Mark ✅
Topic Why Farmer Is Right
Size of today’s deficit The current-account gap hovers around 3 % of GDP, bang-on the latest BEA release.
Stolper–Samuelson redistribution Trade can raise average living standards while hurting some workers—textbook economics and factually correct.
Macroeconomics matters He notes the deficit reflects the national saving–investment balance, not just import duties. That’s the right framework.
Where It Falls Short ❌
Claim The Problem
“Historically unprecedented” deficit The gap topped 6.5 % of GDP in 2006—double today’s share.
“We’re running up debt largely to China” Japan is now the largest Treasury holder; China ranks a distant third. Diversified creditors dilute Beijing’s leverage.
Tariffs will shrink the deficit A 10 % tariff shaves only ~0.2 ppt off the gap. Fiscal tightening or a 10 % dollar slide do 3–5× more work.
Tariffs will revive manufacturing jobs 2018-19 tariff studies show no net job gains once higher input costs and retaliation are included.
What the Numbers Say (2026 Stress-Test)
Policy lever Deficit impact (ppt of GDP) Take-away
+10 % tariff –0.2 ppt Barely a rounding error.
10 % dollar depreciation –0.6 ppt FX moves beat tariffs 3 : 1.
2 ppt fiscal tightening –1.0 ppt Fiscal discipline is the heavy lifter.
Stack them all (25 % tariff +10 % weaker $ +4 ppt austerity) and you can drive the gap below 1 %—but at steep macro costs.
Big Picture
Tariffs are at best a supporting actor. They can’t offset a savings shortfall or an over-strong dollar.
Manufacturing renaissance needs more than border taxes. Think targeted R&D, supply-chain incentives, and workforce up-skilling.
China’s leverage is fading. With its Treasury holdings near 17-year lows, Beijing’s ability to “dump dollars” is more myth than menace.
Bottom-Line Advice
If the policy goal is a materially smaller trade deficit and stronger blue-collar wages, start with fiscal realism and a competitive dollar. Use tariffs sparingly—if at all—and back them with industrial strategy that actually raises productivity.
Wow, you've got a lot of things going on at once. I know: The economy requires it.
I think that tariffs-will-shrink-the-deficit is *at best* a wish that will never come true. I've been reading econ articles and graphing economic data for 50 years and have come across almost nothing on tariffs. Only that they caused the Great Depression; otherwise a cold shoulder.
You can see I don't have much of an economic basis for anything I say about tariffs. So, thank you very much for laying out some measures of the effectiveness of tariff policy. Very much. Thank you.
My economic focus has always been on restoring economic growth and productivity growth. These days, I don't see anyone else focused on growth. Economists pay a lot of attention to "resilience" -- the economy's ability to improve after going downhill. But that doesn't solve the problem of decline.
I very much prefer restoring growth to fiscal restraint. I remember the arguments from the '90s (from both the Wall Street Journal and the Investors Business Daily) showing significant increase in the growth of government spending relative to GDP. The Investors Business Daily (7 February 1995, page B1) said:
[QUOTING:]
Over time, the government sector as a share of the economy has grown. Between 1950 and 1970, federal spending as a share of GDP averaged 18.6%. That figure grew to 22.9% between 1970 and 1990. "We have been stuffing the unsuccessful part of our economy, and starving the successful part," [Milton] Friedman said.
Economic performance seems to support Friedman. Real economic growth averaged 4.1% a year in the two decades following World War II. Between 1970 and 1990, economic growth limped along at 2.7%.
[END QUOTE]
However: Not only did they use the two decades of slow productivity growth for their evidence. They also reported the data as a ratio, so that federal spending growth appeared to be gaining speed. It was not. It was slowing -- but GDP growth was slowing more.
They manipulated the data and they manipulated their readers. And yes, I still resent it.
Tariffs DO NOT CLOSE TRADE DEFICITS
Theory: The trade gap mirrors the gap between national saving and investment; changing tariff rates cannot fix that mismatch.
Evidence: Large-sample studies from the Dallas Fed, Sweden’s National Board of Trade, and several central banks show that broad tariff hikes merely reshuffle which countries we import from; the overall U.S. deficit stays about the same once exchange-rate and macro feedbacks occur. Side-effects include a small real-income hit (about three- to five-tenths of a percent of GDP) and roughly three-quarters of a percentage-point added to consumer prices.
WHAT REALLY SLOWS OR SPEEDS GROWTH
• Capital deepening plateau: business investment slowed after the 1960–70 surge.
• Skill bottlenecks: U.S. college completion and high-skill immigration flattened.
• Spending mix: entitlements rose while public investment (infrastructure, R & D) fell from about 3 percent of GDP to under 1½ percent.
• Regulatory accumulation: each new rule adds compliance drag and dulls total-factor productivity.
SIZE OF GOVERNMENT—LOOK AT LEVELS, NOT JUST RATIOS
The Wall Street Journal and Investors Business Daily correctly noted that federal outlays rose relative to GDP, but most of that rise reflected slower GDP rather than faster spending. Real per-capita federal non-defense outlays grew 2.9 percent per year from 1950-70, then 2.3 percent from 1970-90. Countries such as Sweden and Denmark run public-spending ratios near 50 percent of GDP yet outperform the U.S. on long-run productivity because a bigger share of their budgets goes to human capital and R & D instead of transfers.
A FORWARD-TILTED PLAYBOOK TO REIGNITE GROWTH
Next 12 months:
– Make R & D expensing and bonus depreciation permanent.
– Double high-skill immigration quotas for AI-chip and biotech fabs.
Three-year window:
– Peg infrastructure maintenance dollars to a replacement-cost index to stop deferred-maintenance decay.
– Create a “Productivity Compact” that gives states five-year flexible block grants only if they sunset five percent of regulatory pages each year.
Decade horizon:
– Shift one percentage point of GDP from consumption-style transfers to public investment and frontier science.
– Index Social Security’s retirement age to life expectancy, freeing roughly 0.4 percent of GDP by 2035.
WHY “RESILIENCE” IS NOT ENOUGH
Resilience keeps output from collapsing; it does not push the production frontier forward. The 4 percent real growth of the 1950s-60s came from rapid labor-force expansion, high physical-capital growth, aggressive education spending, and sizable immigration. Demographics are tougher now, but the policy levers—investment incentives, human-capital acceleration, smarter (not necessarily smaller) government outlays, and regulatory hygiene—remain squarely within reach.
BOTTOM LINE
Tariffs feel cathartic but leave the deficit and long-term growth almost unchanged. Sustainable 3–4 percent real growth rests on investment, skills, smart public spending, and regulatory streamlining—not on tariff walls.
OT --
"The Wall Street Journal and Investors Business Daily correctly noted that federal outlays rose relative to GDP, but most of that rise reflected slower GDP rather than faster spending."
Yes, and thank you for noticing! But the WSJ and IBD failed to point out what you point out, that "most of that rise reflected slower GDP rather than faster spending." Instead, they used the numbers as evidence of the excessive growth of government... And yes, I still resent it.
REF: the Investor's Business Daily, 7 Feb 1995, page B1
SEE ALSO: The Wall Street Journal's editorial of 3 March 1995 [page A10] on the Senate's failure to pass the Balanced Budget Amendment. The WSJ had a nearly identical graph on its editorial page of 4 January 1995.
... And yes, I still resent it.
I saved the clippings. But I lost them years ago. Story of my life!
I strongly object to economists' growing focus on resilience and their fading focus on growth --
https://books.google.com/ngrams/graph?content=good+growth%2Ceconomic+resilience&year_start=1840&year_end=2022&corpus=en&smoothing=0
-- so I am happy to see your evaluation of resilience.
I don't study any of the pro-growth concepts that you list. I don't reject them. I just don't study them. I study what I have studied since I quit reading the McConnell textbook in 1977: Money.
Everyone remembers Milton Friedman for "inflation is always and ever". No one remembers that he also said:
"There is strong evidence that a monetary crisis involving a substantial decline in the quantity of money is a necessary and sufficient condition for a major depression. Fluctuations in monetary growth are also systematically related to minor ups and downs in the economy..."
https://archive.org/details/moneymischiefepi0000frie/page/48/mode/2up?q=%22There+is+strong+evidence%22
I'm finally starting to think of my computer as mine again, after the painful change to Windows 11.
A more modern view, Milton Friedman was right about the direction, but it is too absolute about the mechanism. Not his fault because the use of credit was almost nonexistent in the economy.
Money contractions still break economies — but today, it’s often the credit system, not just base money, that delivers the damage.
The modern “quantity of money” includes shadow banking, liquidity confidence, and leverage — all forms of monetary energy. When those evaporate, the result is the same: activity collapses, confidence vanishes, and the downturn deepens.
In that sense, Friedman’s logic still holds.
The labels change. The mechanics evolve.
But when money — however defined — disappears, real activity always follows.
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