On February 19th the Wall Street Journal reported that America imported a record amount of goods last year and that the U.S. trade deficit in December – the latest date for which figures are available – rose $70.3 billion.  The goods trade deficit hit a record $1.24 trillion in 2025.   These figures come as a surprise.  The tariffs imposed by the Trump administration starting in April of last year were supposed to curtail imports and spur domestic production.  So, what happened?  Why hasn’t the trade deficit improved? At first glance, tariffs seem straightforward. Make imported goods more expensive and Americans will buy fewer of them. In theory, that should shrink the gap between what the U.S. buys from other countries and what it sells to them. But in practice, that’s not what’s happening. One reason is that other countries haven’t simply accepted the hit. Instead, many have doubled down on supporting their own exporters. Governments in Europe and Asia have rolled out subsidies, financing programs, and industrial policies to help domestic companies stay competitive. So even when tariffs raise costs, foreign producers often find ways to offset the impact and keep their goods flowing into global markets, including the U.S. Another key point is that tariffs tend to rearrange trade rather than reduce it overall. If imports from one country become more expensive, businesses often shift to suppliers in another country. The source changes, but the total volume of imports doesn’t necessarily decline. That means the overall trade deficit can remain largely intact, even if trade patterns look different. Economists have argued for years, with plenty of evidence, that trade deficits are driven by deeper macroeconomic forces. The U.S. tends to spend more than it saves, and when a country consumes more than it produces, it imports the difference. That imbalance shows up as a trade deficit. Tariffs don’t change national savings rates or deficit spending by both public and… | Read More »