Trump's tariffs are designed for maximum damage—to America

President Donald Trump touted his bewildering array of "Liberation Day" import tariffs as carefully calibrated to offset trade partners' tariff, nontariff, and currency barriers to US exports. However, details of the calculations released by the office of the US Trade Representative (USTR) show that in reality, the tariffs' effect will be to curtail US trade the most precisely where it provides America with the biggest benefits. The result will be a direct hit on US consumers and businesses. No wonder the stock market is swooning.

The tariff plan displays a basic misunderstanding of the reasons why nations trade in the first place—reasons that imply the United States will run deficits with some trade partners (bilateral deficits) and surpluses with others (bilateral surpluses). The reasons reflect the operation of comparative advantage. For example, the US imports aluminum from countries that can produce it most efficiently, while embodying it in exports where it has the advantage, such as aircraft. This will tend to lower US trade balances with efficient aluminum producers and raise them with aircraft importers. The same is true for households and businesses. I have a surplus with my textbook publisher, Pearson, because I am relatively better at writing textbooks while they are better at publishing and distributing. But I chose to have a deficit this year with my ophthalmic surgeon rather than trying to remove my cataracts myself.

Yet the USTR report reveals up front that their "calculation assumes that persistent trade deficits are due to a combination of tariff and non-tariff factors that prevent trade from balancing." This is a fundamental misconception and suggests that Trump's administration did not even try to calculate the true heights of trade barriers. For example, Korea was hit with a tariff of 26 percent, even though it has a free trade agreement with America and its tariff rate on US imports was only 0.79 percent in 2024. The tariff's entire justification was Korea's sizable bilateral surplus in goods with the United States, much of it due to Americans' taste for Hyundai and KIA vehicles.

Trade barriers certainly can influence bilateral trade balances, but to think that every persistent bilateral balance is due to trade barriers misunderstands the basic reason why countries trade. Countries trade to specialize in the goods and services they are best at producing, which naturally means having possibly persistent surpluses with some trade partners and deficits with others. Trying to squash every bilateral balance to zero through brute-force tariffs is to levy taxes on international trade exactly where it provides the most benefits to Americans. Yet, this is what Trump's tariff numbers are designed to do.

But the tariffs rolled out on April 2 will not even accomplish the goal of balanced American trade. Behind Trump's tariff initiative is his stated desire to reduce the overall US trade deficit in goods, which was 4.2 percent of GDP in 2024.¹ This deficit reflects that Americans spend more than they produce, obliging them to import the difference from abroad. Until the United States reduces its spending relative to its income—for, example, by narrowing the federal budget deficit—the US overall trade deficit will not go away. Since the overall trade deficit is the sum of US surpluses and deficits with all trade partners, the administration's attempt to eliminate all bilateral deficits is doomed to failure. At best, it will be able to shuffle them around, in a game of whack-a-mole where a smaller deficit with one country is matched by higher bilateral deficits with others. In the process, however, the efficiency gains from international trade are sharply curtailed.

Part of the game will be US buyers switching their imports from high- to low-tariffed countries. Buyers of natural rubber can shift their purchases from Thailand (37 percent tariff rate) and Indonesia (32 percent tariff rate) to Côte d'Ivoire (21 percent tariff rate) and Liberia (10 percent tariff rate). In the process, they will incur switching costs and higher costs of transportation. As another result, the bilateral balances of Thailand and Indonesia with America will shrink while those of Côte d'Ivoire and Liberia will rise. Will the US administration then decide to raise the so-called "reciprocal" tariffs for the two African nations and lower them for the Asian ones? That would reflect whack-a-mole in action and be an additional source of ongoing growth-reducing uncertainty for the US and world economies. But most likely, the higher Asian tariffs would just remain high.

If the US economy falls into recession because of Trump's arbitrary tariffs and our trade partners' responses, its overall trade balance may improve as consumption and investment crater. Foreign economies will be hit hard too, and in the end, the net outcome for the US trade balance may depend on whether the recession is more severe at home or abroad. That would be a race to the bottom that no one wins.

Note

1. As measured by the Bureau of Economic Analysis, the United States has a service export surplus equal to 1.1 percent of GDP. However, this figure likely understates the true surplus in services owing to the profit-shifting strategies of some multinationals.