Soaring Trade Deficit In August Suggests Trump Tariffs Are Failing
It’s been almost a year and a half since “Liberation Day,” the day that Trump announced his “reciprocal” tariffs, slapping tariffs on imports from our trading partners to punish them for selling us stuff. Ostensibly, the goal of the tariffs was to eliminate, or at least reduce, our trade deficit.
Trump seems to believe that we are being ripped off if we buy more goods from a country than we sell to them. There can be problems caused by a large trade deficit, especially one that is rapidly growing, as was the case in the first decade of this century. But it doesn’t make sense to claim a country is ripping us off by selling us stuff.
Anyhow, whatever problems we have with trade are poorly addressed by the sort of blanket tariffs imposed by Trump. We may want tariffs to promote the development of certain industries, like solar panels or EVs, or to ensure a stable supply of essential products, like steel and rare earth minerals, but such efforts have little to do with Trump’s tariffs.
Discussion
Dean Baker argues that Trump’s tariffs are failing by Trump’s own stated standard: reducing the trade deficit. The preliminary U.S. goods deficit reached $132.6 billion in August, up from $118.9 billion in July. Baker explains that businesses initially rushed to import goods before tariffs arrived, then reduced purchases while using those inventories. That temporary decline did not establish a lasting improvement. He attributes much of the renewed increase to semiconductor imports supporting the AI boom. The August figure covers goods alone; America’s services surplus offsets part of it. (U.S. Census Bureau)
The economically illiterate premise is that buying more from another country than we sell to it means that country is cheating us—and that taxing those purchases makes us richer. Imports bring us goods we want, including equipment and components that help American businesses produce more efficiently. Countries benefit by specializing and trading; there is no economic requirement that trade with every individual country balance. A deficit can create vulnerabilities, but it is not, by itself, evidence of exploitation. Baker distinguishes blanket tariffs from targeted measures intended to protect an essential industry or address a specific security risk. Federal Reserve research recognizes both the gains from specialization and those possible strategic justifications. (Federal Reserve)
Tariffs raise prices because they are taxes collected from importers, rather than bills sent to foreign governments. For example, if an American business imports a $100 component subject to a 25% tariff, it owes $25 in duty. A foreign supplier might lower its price and absorb some of the burden, but the remaining cost falls on the American business or its customers. The business must raise prices, accept smaller profits, or find another supplier. This affects American-made products too: domestic manufacturers use imported materials, parts, and machinery. CBO expects foreign exporters to absorb only a small share of the tariff costs and projects higher prices and reduced household purchasing power. (Congressional Budget Office)
The damage extends to business growth. More expensive equipment makes expansion less attractive, thinner margins leave less money to invest, and higher consumer prices leave customers with less money for other purchases. Retaliation can also hurt American exporters. Although some protected producers benefit, CBO projects that the tariffs’ overall effect is to reduce investment, productivity, employment, and economic output relative to what would have occurred without them. (Congressional Budget Office)
Constantly changing tariffs add uncertainty to those higher costs. A business considering a new factory, store, or product needs to estimate costs and sales over several years. If tariff rates, exemptions, and supplier access keep changing, those estimates become unreliable. Waiting becomes more attractive than committing money and hiring workers. In a May 2025 survey reported by the Atlanta Fed, businesses said policy uncertainty—with tariffs their leading concern—would cause them to reduce planned hiring by about 13% and investment by 16% over the following six months. Those were reported intentions, rather than measured economy-wide losses, but they directly illustrate the planning problem. (Federal Reserve Bank of Atlanta)
The trade deficit alone is a poor measure of whether tariffs are helping the economy. A larger deficit can reflect businesses buying imported equipment to expand production; a smaller one can reflect consumers and businesses struggling to afford purchases. Neither proves that Americans are better or worse off. Nor does one month’s increase establish how much tariffs have affected the deficit. Trump’s fundamental mistake is treating the trade balance as a scorecard of who is winning and losing, when the relevant question is whether his policies improve Americans’ purchasing power, productivity, and opportunities.
On those measures, the evidence points to harm from blanket tariffs, even when other forces keep the economy growing. Making Americans pay more and businesses invest less is economic damage, even if it produces the smaller trade deficit Trump calls a victory. So far, his tariffs have not delivered even that sustained reduction.
