Although the US trade deficit has brought short-term advantages via cheap goods and capital inflows, its long-term structural costs—deindustrialization and social fragmentation—have outweighed the gains. Photo: TUCHONG

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Since April 2025, the Trump administration has adopted “reciprocal tariffs” as a tool, basing tariff rates directly on bilateral trade deficits in an attempt to reverse them through protectionist measures. However, the US trade deficit is fundamentally rooted in the global division of labor, the hegemonic role of the US dollar, and structural contradictions within the US economy. Relying solely on tariffs ignores these structural causes and cannot effectively address trade imbalance. On May 12, 2025, the Joint Statement on China-US Economic and Trade Meeting in Geneva was issued, in which both parties pledged to adjust tariffs within a set timeframe and to establish a mechanism to continue discussions about economic and trade relations—affirming the need for structural approaches.

Formation and effects of US trade deficit

Following World War II, the US, leveraging its economic dominance, promoted the General Agreement on Tariffs and Trade, advancing global trade liberalization. From 1945 to 1971, although US exports grew rapidly, imports outpaced them, leading to a gradual erosion of the trade surplus and the first recorded trade deficit of $1.303 billion in 1971. Between 1991 and 2016, the acceleration of globalization drove large-scale outsourcing of US production, rapidly expanding the deficit. Although the US services surplus also grew, it was insufficient to offset the overall imbalance. After the 2008 financial crisis, the deficit narrowed briefly but rebounded with economic recovery. In 2017, under the “America First” policy, the Trump administration launched a trade war against China and imposed widespread tariffs in an attempt to curb the deficit— but with limited success, as the deficit only widened further. 

In essence, the US trade deficit is a systemic and structural outcome of the global division of labor, domestic economic structural contradictions, and dollar hegemony. First, the reconfiguration of global industrial chains has induced structural imbalances in the US economy. Since the 1980s, manufacturing has shifted rapidly to developing countries, while the US outsourced low value-added sectors and focused on high-end segments. This weakened its domestic manufacturing and increased import dependence. Second, the structural contradiction of “low savings–high consumption” exacerbated the deficit. The US household savings rate declined from 8% in the 1960s to just 2.3% in 2022, with consumption increasingly driven by credit expansion. In 2024, household debt reached 11.29% of disposable income in the US. To bridge this savings gap, the US relies on foreign capital inflows to finance its current account deficit. Third, dollar hegemony gives the US a unique capacity to finance its current account and fiscal deficits. As the primary global reserve currency, the dollar compels surplus countries to recycle funds into US Treasury securities, forming a “goods–dollar–US Treasuries” cycle. This enables the US to maintain deficits with low interest rates. The Triffin Dilemma illustrates the inherent contradiction between global dollar supply and currency stability, which requires the US to continually run deficits to sustain global liquidity. This contradiction grew especially pronounced after the 2008 financial crisis, as emerging economies were forced to hold more dollar assets to hedge exchange rate risks.

Despite its negative aspects, the persistent trade deficit has yielded certain benefits for the US. First, it has significantly lowered domestic consumer costs. Second, it serves as a channel to attract global capital. As the dollar remains the dominant reserve currency, surplus countries reinvest in US Treasuries or enterprises, reducing financing costs and fueling US economic expansion. Third, the deficit allows the US to concentrate on high value-added segments, capturing global profits through the “Smiling Curve” effect.

However, the trade deficit has also produced deep structural challenges. Persistent import dependence has hollowed out US manufacturing, leading to decline in the Rust Belt regions, supply chain fragmentation, and diminished innovation capacity. Trade and fiscal deficits are mutually reinforcing, intensifying macroeconomic imbalances. Continued dependence on external financing poses risks, especially as major creditors reduce holdings of US Treasuries in favor of gold or alternative reserves. The deficit also exacerbates income inequality. Manufacturing decline has led to job losses among traditional workers and a shrinking middle class, fueling social stratification and political polarization.

In sum, although the US trade deficit has brought short-term advantages via cheap goods and capital inflows, its long-term structural costs—deindustrialization and social fragmentation—have outweighed the gains. This highlights the significant challenges posed by profound transformations within the global economic order.

Reciprocal tariffs ineffective in eliminating trade deficits

Reciprocal tariffs cannot effectively eliminate the US trade deficit, as they violate the law of factor endowment, fail to address dollar system, disrupt global supply chains, and are likely to provoke retaliatory measures—ultimately increasing economic uncertainty rather than resolving structural problems.

First, according to the factor endowment theory, comparative advantages arise from differences in resource allocation across countries. The US holds comparative advantages in capital- and technology-intensive industries, while developing countries are more competitive in labor-intensive sectors. The Trump administration’s attempt to promote manufacturing reshoring through reciprocal tariffs overlooks structural realities such as high domestic labor costs and fragmented industrial chains. Given the deep integration of global value chains, many US firms rely heavily on intermediate goods from China. Tariffs raise input costs, thereby reducing the competitiveness of US enterprises.

Second, as the issuer of the world’s primary reserve currency, the US is able to maintain persistent trade deficits without being constrained by balance of payments pressures. Even if imports fall, capital returns maintain the deficit structure. Moreover, trade partners can offset tariffs through exchange rate adjustments. For example, during the 2018 US-China trade dispute, a moderate depreciation of the RMB diminished the impact of tariffs, reducing improvements in the US trade balance. As long as the dollar retains its dominant status, tariffs cannot fundamentally address trade imbalances and may instead trigger global financial volatility.

Third, modern international trade is based on transnational division of labor. The US depends heavily on Chinese intermediate goods in several critical industries. Tariffs increase import costs, disrupt domestic production, and reduce the efficiency of global supply chain coordination. For instance, US semiconductor firms have faced component shortages and rising costs due to increased tariffs on Chinese components, undermining their global competitiveness. Additionally, multinational corporations often respond by shifting production to third countries rather than reshoring to the US, further weakening the intended policy outcomes.

Fourth, unilateral tariff actions lead to reciprocal retaliation and heightened trade tensions. The Trump administration’s tariff measures prompted countermeasures from China and others, inflicting significant losses on US agriculture and manufacturing. These actions also violated multilateral rules under the World Trade Organization (WTO) and were subject to legal challenges from multiple countries. Thus, reciprocal tariffs not only fail to meaningfully reduce the trade deficit but also exacerbate uncertainty and hinder global economic cooperation.

In sum, under the constraints of the global value chain and the dollar system, reciprocal tariffs are unlikely to be effective.

Impacts of reciprocal tariffs on China and policy recommendations

The reciprocal tariff policy primarily affects China through rising trade costs, reduced exports, and shifts in global industrial chains. Nevertheless, due to China’s strong economic resilience, the overall impact remains relatively limited.

In terms of direct effects, reciprocal tariffs have increased the cost of Chinese exports to the US. Since the onset of the US-China trade dispute in 2018, China’s trade surplus with the US has gradually narrowed. While further tariff escalation exerts pressure on exports, China’s capacity for import substitution remains strong, and domestic demand is expected to partially offset the decline in external demand.

Regarding indirect effects, reciprocal tariffs may lead to capital outflows and industrial chain relocation. Some low-barrier industries may shift production to third-party countries or regions such as Southeast Asia or Latin America. At the same time, such pressures are likely to accelerate China’s domestic industrial upgrading and structural transformation.

In terms of overall impact, the policy’s influence is limited by China’s robust capacity to absorb external shocks. In 2024, final consumption expenditure contributed 44.5% to economic growth, remaining the primary engine of economic expansion. Looking ahead, as supply chains are further optimized and independent innovation improves, China will be better positioned to respond to external uncertainties.

Building on the consensus reached in the Joint Statement on China-US Economic and Trade Meeting in Geneva, China should continue to implement measures to enhance economic autonomy and international competitiveness, maintaining strategic initiative amid a volatile global environment. This will merit focused efforts in several key areas.

First, the domestic economic cycle and global supply chain resilience should be deepened. Expanding domestic demand is essential for constructing a strong domestic economic cycle. On the supply chain front, efforts should focus on overcoming technological chokepoints, advancing high-tech self-reliance, and building a diversified international supply network to improve risk resistance.

Second, an independent and controllable innovation system is essential for industrial upgrading. China should strengthen basic research and the development of key technologies, supported by stable policy frameworks and funding mechanisms, so as to enhance its efficiency in translating research into industrial applications. Simultaneously, more open talent policies should be adopted to attract and retain high-caliber professionals.

Third, it is necessary to promote reform of multilateral mechanisms and expand regional trade and economic cooperation. China should advocate for the restoration of the WTO dispute settlement mechanism, reinforce the institutional voice of developing countries, and improve global connectivity.

Yu Zhen is deputy director and secretary-general of the China-America Economic Association at Wuhan University, and director of and a professor from the Institute for the US and Canadian Economies (IUCE) at Wuhan University. Shen Qingyu is a research assistant at the IUCE.

Edited by  REN GUANHONG