The Trump administration has chosen the elimination of the U.S. trade deficit as its chief economic policy objective. This is misguided. In almost all cases, the magnitude of a country’s trade deficit should not be viewed as a policy variable.
President Trump’s tariffs were implemented to supposedly combat the United States’ large and persistent trade deficits. The Trump administration believes these deficits are the result of foreigners taking advantage of the United States through unfair trading practices. As we wrote two weeks ago, the administration is wrong on both counts. The U.S. trade deficit is homegrown, and it is easy to finance due to the privilege of Americans’ access to cheap capital.
Now that tariffs have been implemented, with the threat of more to come, on the basis of a misguided conception of trade deficits, they risk attenuating two great United States surpluses: its trade surplus in services and the large capital surplus resulting from the United States’ trade deficit. Not surprisingly, President Trump’s lips are sealed with regard to those surpluses.
A trade surplus
The Trump administration has deep-sixed the services story because the U.S. consistently runs a large trade surplus in its services sector. In fact, in 2023, the U.S. imported about $750 billion in foreign services and exported over $1 trillion in domestic services. This resulted in a services surplus of $250 billion. The story was much the same in 2024, when the U.S. ran a trade surplus in services of nearly $300 billion. This year, in the first two months of 2025, the United States has run a services surplus of $50 billion, indicating that it is again on track for an annual surplus of $300 billion.
Where does this services surplus come from? The largest component of the U.S. services surplus was in financial services, an industry that generated a $130 billion trade surplus in 2024. American banks span the globe, particularly when it comes to providing fee-generating investment banking advisory services to foreign companies. Indeed, in 2024, the top five spots for global investment banking revenue were occupied by none other than Goldman Sachs, J.P. Morgan, Morgan Stanley, Bank of America, and Citigroup.
Tariffs threaten this services surplus because they create uncertainty, and uncertainty hits investment banking revenues hard. Every year, there are a finite number of companies in the market for advisory services on mergers, acquisitions, or debt or equity financing—a “fixed pie,” if you will. Each bank competes for a bigger and bigger slice of that pie. When a healthy dose of uncertainty is injected into earnings, companies find it harder to make the long-term plans necessary for a merger or a new round of financing. Thus, the fixed pie shrinks, investment banking revenues shrink, and the U.S. services surplus shrinks. We are already watching this mechanism work out in slow motion. For example, since “Liberation Day” on April 2, when the White House announced new tariffs, companies such as American Airlines, Delta, Southwest, Diageo, and Logitech have already stopped releasing forward guidance. At the same time, dealmaking activity has ground to a halt.
A capital surplus
Tariffs have put the United States’ capital surplus at risk, too. Nobelist Milton Friedman once remarked in an interview that “the trade deficit is not a deficit. In another sense, it’s a capital surplus.” Indeed, the trade deficit and the capital surplus are two sides of the same coin. When the United States runs a deficit in its trade of goods and services (the current account), the balance of payments identity dictates that it must be offset by a deficit in the United States’ financial account. The U.S. financial account registers a negative balance when foreigners’ purchases of U.S. assets are greater than the United States’ purchases of foreign assets. This is, in fact, a net capital surplus. And, as it turns out, the United States has registered a net capital surplus nearly every quarter since 1982.
Any policy to reduce a bilateral imbalance is likely to reduce the absolute volume of trade and the level of economic well-being in all countries. Unsurprisingly, tariffs have both lowered growth prospects in the United States and have incited talks of targeted foreign retaliation against U.S. companies. This makes U.S. equities less attractive to foreign portfolio managers. China has already added more U.S. companies to its Export Control List and Unreliable Entity List, and the European Union has threatened to implement stricter regulations on U.S. tech companies. Tariffs have also generated interest rate volatility in the Treasury market, damaging Treasury securities’ safe-haven status and making the $9 trillion government agency mortgage-backed securities market relatively less attractive to international investors.
President Trump wants to end the U.S. trade deficit with tariffs. This is impossible—the only way to reduce the U.S. trade deficit is to bring U.S. savings in line with U.S. investment, which would occur, for example, if policies were enacted to balance federal, state, and local government deficits. So, not only are tariffs a futile avenue towards reducing the U.S. trade deficit, they risk eliminating two longstanding U.S. surpluses—its services and capital surpluses. In this trade war, any victory for the U.S. would be a Pyrrhic victory.
Steve H. Hanke is a professor of applied economics at the Johns Hopkins University and the author, with Leland Yeager, of Capital, Interest, and Waiting. Caleb Hofmann is a research scholar at the Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise.
The opinions expressed in Fortune.com commentary pieces are solely the views of their authors and do not necessarily reflect the opinions and beliefs of Fortune.
Read more:
- Trump’s tariffs are not ‘common sense’—and they’re putting America’s credibility and ‘exorbitant privilege’ at risk
- Trump’s tariffs program is based on flawed assumptions about the trade deficit
- Tariffs won’t make America great again: Export-Import Bank’s former chairman and president
