Sure, Trade Deficits Matter. But They’re Not the Only Thing

In the funniest meme to come out of President Trump's April 2 tariff announcement, a hapless penguin sits in the Oval Office, getting the Zelensky treatment from Trump and Vice President J.D. Vance. At least the poor bird had the good sense to wear a tux.

The meme pokes fun at the deeply flawed premise behind this week's tariffs, which hinge entirely on goods trade deficits (at least when they exceed 10 percent) as if such deficits are inherently evil. The punchline? The United States naturally runs big goods trade deficits with tiny, sparsely populated islands that have more penguins than people.

Tiny islands may have some proportionately small quantities of goods to sell-like tasty, plentiful fish that we and our penguin friends can all enjoy-but the stout, flightless birds and their sparse human neighbors are not exactly big buyers of U.S. tractors, motorcycles, and other manufactured goods. And so, under the new deficit-focused tariff policy, our erstwhile penguin allies must now bear the uncomfortable heat of U.S. tariffs.

A slower, more thoughtful policy development process might have spared the icy islands and other relatively absurd or impoverished targets that made the tariff hit list. The fact that they nonetheless remain at least highlights the frailty of treating trade deficits as the primary driver of U.S. trade policy.

In fact, trade deficits are the only factor behind the steeper tariffs announced-those higher than the blanket 10 percent tariff applied even to countries with which we have a trade surplus, such as the United Kingdom. Details released by the White House confirm that the purported foreign "tariffs" it claims to be responding to with higher "reciprocal" tariffs are derived from nothing other than goods trade deficits. The administration's numbers treat those deficits, which in reality are largely a byproduct of America's investment-driven economy, as if they are foreign attacks that demand retaliation.

The big kernel of truth in all of this? Trade deficits in manufactured goods are a genuine point of concern. Deficits are not the sole cause of U.S. manufacturing's decline, but they do play a role and reflect a grave underlying problem-one that needs to be addressed with both trade and non-trade measures targeted at strengthening our high-value, innovation-intensive manufacturing sectors in particular.

Unfortunately, the fetishization of goods trade deficits in the April 2 announcement does a disservice to the many other pressing trade issues impacting the broader U.S. economy. These issues include many that impact the 80 percent of GDP and 85 percent of jobs derived from the services sector, especially high-value, innovation-intensive services, as well as the intellectual property assets on which they depend.

These vital sectors face myriad trade barriers, including discriminatory taxation (e.g., digital services taxes), disproportionate regulation, and obstacles to cross-border information flows, to name just a few. Previous announcements from the Trump administration held out the promise of a renewed focus on these non-tariff barriers to services and information technology trade, which had been largely neglected under the Biden administration. Renewing that focus actually makes sense if you care about trade deficits: The United States runs a $287 billion trade surplus in services.

Alas, the president's April 2 announcement, fixated on goods trade deficits, tends to signal to U.S. trading partners that this single metric alone embodies all U.S. concerns. To be clear, it does not. Erasing goods trade deficits won't address discrimination against U.S. tech companies or pry open the Chinese market, which remains firmly closed to many high-value U.S. services exporters.

The result is a potential lose-lose proposition for the industries, firms, and workers that represent the lion's share of the current U.S. economy. While they will endure all the disruption that a trade war brings to the wider economy, the hoped-for reductions in goods trade deficits will not at all ease these exporters' pressing concerns about unfair practices and unduly burdensome regulation in markets around the world-especially if countries reduce their deficits by simply ramping up commodity imports like timber, minerals, agricultural products, fish, and more.

So, is it possible that trade deficits are merely a convenient casus belli for launching a trade war that will ultimately pursue more comprehensive goals? It is possible. But a single-minded, narrowly focused trade war built on such a flimsy premise will struggle to sustain enough public support to achieve even its initial aims, much less enable a pivot to broader and more impactful goals.

We might have been better off leaving the penguins in peace.