If tariffs were supposed to bring down the US trade deficit, then the latest numbers clearly show that things are not exactly going according to plan.
The US trade figures for August showed the deficit widening to $105.6 billion, up from $92.8 billion previously. But more strikingly, imports jumped 4.3% to a record $420.8 billion while exports rose by a much smaller 1.4% to $315.2 billion.
And that seems to be the exact opposite of what Trump’s tariffs approach was supposed to achieve. Surprise, surprise. Not.
Let’s take this back to the basic idea behind tariffs. The use of tariffs is to make foreign goods more expensive in order to encourage companies and consumers to buy American instead. And over time, you should be importing less as a result.
The problem here is that the US trade deficit has never been quite that simple.
Just take a look at what businesses are actually buying. Capital goods imports rose by $6.2 billion in August to a record $146.4 billion, helped by semiconductors and industrial machinery. Now, that is hardly a sign that US companies are simply ignoring tariffs. For the most part, it still reflects the notion that businesses are still spending heavily on equipment, technology and the infrastructure needed to support the AI boom.
And if those products aren’t readily available at home, what exactly is a company supposed to do?
It can either pay the tariff, find another overseas supplier, or simply just delay the purchase. However, none of those options magically creates a new semiconductor factory or machinery supply chain in the US overnight.
To me, that is where the tariffs argument starts running into the reality of how things actually work – not just in theory.
Don’t get me wrong. Tariffs can absolutely still change trade flows. They can make imports from one country less attractive and push companies towards another supplier. But the crux of the matter is, changing where the US buys from isn’t necessarily the same thing as changing how much the US buys from overseas.
And that is the important caveat to take note of. As long as the US economy continues to consume and invest heavily, especially in goods that cannot be so easily be produced domestically, then imports are somehow going to keep finding their way in.
Sure, tariffs can change the price. They can change the supplier. And they can even change the trade route. But changing the US’ underlying demand for imports? That is a much, much tougher job.
This article was written by Justin Low at investinglive.com.