Scott Lincicome and Chad Smitson
Economists have long understood that, because the US trade balance is determined by global macroeconomic factors (i.e., savings and investment at home and abroad), its size and trajectory would be generally unaffected by discrete national trade policies—even global tariffs. And because the causes of the trade balance vary from benign to problematic (or both), economists generally don’t think it’s a useful scorecard for US trade policy or the economy more broadly.
On each account, the data keep proving them right.
As Figure 1 shows, despite more than a year of historically high tariffs and after wild pre- and post-tariff gyrations, the nominal US trade deficit was actually higher in August than before this administration’s grand tariff experiment began last spring—just as trade economists and other experts predicted before the tariffs began.
The deficit also appears to have reverted to 2024 levels as a share of GDP, seen in Figure 2.
The same reality applies to the US merchandise trade balance, which isn’t economically meaningful but is something the White House and its allies have said could be “fixed” by historically high US tariffs. As we noted in June, the data were starting to puncture the Trump administration’s claims, and yesterday’s BEA release solidifies the trend. In particular, the real (inflation-adjusted) US merchandise trade deficit hit $114.7 billion in August—larger than any month in the 2022–2024 pre-tariff period and the largest since early 2025, when American importers brought in extra goods to front-run Trump’s forthcoming tariffs.
Indeed, the headline number arguably understates the tariffs’ inefficacy in this regard. Earlier this year, surging US petroleum exports tied to the war with Iran narrowed the deficit, with the surplus reaching nearly $9 billion in April and May. That trend has now reversed, and nearly all of August’s deficit growth came from non-petroleum goods. Excluding volatile petroleum products, the real deficit reached $122.6 billion, well above any month in 2022–24.
And because the real figures include large exports of gold, which we discussed in a previous blog post, the non-petroleum figures likely understate the true trade gap even further.
As Cato scholars have repeatedly explained, the US trade deficit isn’t necessarily a “bad” thing and, in fact, is usually a sign of strong underlying fundamentals like a growing US economy and the United States’ attractiveness as an investment destination. The latest data also support this view, which again contradicts the White House’s pro-tariff, anti-deficit narratives. In particular:
The recent expansion of the goods trade deficit has been driven in large part by imports of inputs and machinery that are driving the historic US AI buildout, which, in turn, is driving the current US economic expansion. The widening trade deficit also appears to be tracking an acceleration in US economic growth in the third quarter, in line with the strong historical correlation between the trade deficit and US GDP growth.
Foreign investment also appears to have picked up, with foreign net purchases of US corporate stocks and bonds at a distinct high after adjusting for inflation. As Cato scholars have also explained, these capital inflows are part of the financial account—the mirror image of the US current account (of which the trade balance is the largest part). Put simply, foreign investment into the United States largely consists of dollars Americans spent abroad on imports—dollars that foreigners choose to spend on US assets (equities, debt, real estate, FDI, etc.) instead of US goods or services. When Americans invest more than they save, foreign savings fill the gap. Increasingly, as seen in Figure 7, foreign savings are fueling the growth of private American companies.
The administration’s tariff experiment has been an unfortunate demonstration that tariffs will not fundamentally change a country’s trade balance because they don’t change the underlying savings and investment patterns that drive it. Tariffs can cut imports, but they also tend to cut exports (through a stronger dollar, retaliation, and costlier inputs). As long as savings/investments don’t change, the trade balance won’t either (though certain short-term fluctuations are inevitable).
It’s a simple lesson—one we’re relearning in real time.
