Donald Trump’s tariff strategy is not only aggressive, but perhaps mathematically impossible as well.
With a new formula tying import taxes to the US trade deficit with individual countries, the administration claims it’s restoring fairness.
But the simplicity of that formula masks a deep misunderstanding of how trade deficits actually work and why treating them like economic theft may do more harm than good.
What are the new tariffs trying to fix?
‘Liberation Day’ tariff policies introduced a baseline 10% tariff on nearly all imported goods since April 5.
On April 9, a second phase will impose much higher, country-specific tariffs based on how much more the US imports from a country than it exports to it.
For example, because the US imported $605.8 billion from the EU in 2024 but exported only $370.2 billion, Trump’s team identified a 39% “deficit ratio,” then halved it and imposed a 20% tariff.
The rationale from the White House is simple: if the US has a large trade deficit with a country, that country is taking advantage of the US by exporting more than it imports.
The goal is to close the trade gap by making foreign goods more expensive so Americans buy less of them.
Then the country can re-industrialize production.
But, from a mathematical perspective, this approach misrepresents how global trade works and how trade deficits are formed.
Trade deficits are not losses
A trade deficit means a country is buying more from abroad than it sells. But this is not the same as losing money.
In most cases, the US pays for those imports with dollars, which are then recycled into US assets like Treasury bonds, real estate, and equities by its trade partners.
This financial flow is recorded in the capital account and balances the current account deficit.
Think of it like buying something on a credit card. You get the item now and pay later. The seller might hold your IOU for years.
In international terms, a US trade deficit often means other countries are lending money to the US by purchasing its debt or investing in its economy.
So, when the US imports a machine or any item from China, and sends back a Treasury bond, it is essentially trading goods for an IOU.
If the imported item increases American productivity or consumption, then the trade is worthwhile.
What’s actually behind the trade deficit?
Trump’s strategy assumes trade deficits are caused by unfair foreign practices, such as tariffs or subsidies.
In reality, most of the US trade deficit is driven by domestic factors.
Americans consume more than they produce, partly due to a strong dollar and persistent government deficits.
The dollar remains the world’s reserve currency, attracting investment and inflating its value, making imports cheaper and exports more expensive.
Moreover, services trade, where the US has consistent surpluses, is excluded from the tariff formula.
What’s being left out of the conversation is that the US runs large surpluses in software, finance, and intellectual property.
In fact, the US services surplus amounted to around $250 billion in 2022. Other reports mention that services make up around 70% of the American economy.
But the new tariffs only consider physical goods. This skews the picture and leads to aggressive tariffs on countries where the overall balance, including services, may not be as lopsided as it seems.
Another factor often overlooked is the structure of supply chains. Many “imports” are actually US-designed goods produced overseas.
The iPhone is a classic example. Manufacturing happens in Asia, but much of the value is captured by Apple in the US.
This trade technically shows up as a deficit, but in reality, the US is still earning on those final sales.
Are tariffs making things worse?
The rest of the world is already responding.
So far, China has imposed a 34% tariff on all US goods, effective April 10. The EU and Japan are preparing similar responses.
Financial markets are already feeling the pain. The S&P 500 dropped 6% on Friday, following a 4.8% decline the day before.
On Monday, pre-market trading, the index dropped below 5,000. The Nasdaq has entered bear market territory, and oil prices have fallen to three-year lows.
Banks like JPMorgan and Citi have downgraded their US growth forecasts for 2025.
JPMorgan now expects a contraction of 0.3% instead of 1.3% growth. Citigroup slashed its forecast to just 0.1%.
Manufacturing activity indicators are also falling, as American producers face higher costs on imported components and declining demand from retaliating countries.
Instead of revitalizing American industry, the tariffs appear to be hurting it. Layoffs in the auto and steel sectors are already being reported.
Companies reliant on global supply chains are facing disruption. The US is risking both higher inflation and lower output.
What’s the long-term effect?
Domestically, higher tariffs could mean more expensive goods for American consumers and lower margins for businesses that cannot easily shift production back home.
American companies that rely on international supply chains, such as Apple, Tesla, and Nvidia, have already seen their stock prices fall between 3% and 6% in a single day.
Additionally, China’s 34% tariff on all US goods directly threatens farmers, machinery exporters, and tech firms with heavy exposure to Asia.
Over time, persistent trade deficits can cause some weaknesses to an economy, like a decline in manufacturing or over-reliance on consumption.
But they are not inherently negative. The key is how the borrowed resources are used.
If the US runs a trade deficit to finance productive investment, such as importing advanced machinery that boosts future output, it can be beneficial.
If it funds consumption, like TVs and luxury cars, the long-term benefit is lower.
Trump’s tariffs, however, do not differentiate. They treat all deficits as equally bad and all trading partners as equally guilty.
This blunt approach risks long-term damage to both trade relationships and the US economy.
Rather than reducing the deficit by boosting exports, the policy is likely to shrink both imports and exports, leaving the US poorer, not stronger.
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