The Dallas Federal Reserve offers a more extensive explanation. Economic theory and macroeconomic evidence do not strongly support the idea that tariffs alone can reduce trade deficits. Although tariffs alter trade flows, their net impact on the trade balance is ambiguous and is often neutralized by other factors.
The analysis identifies three key channels that help understand why the deficit does not disappear. The first relates to input costs. Many tariffs fall on intermediate goods. By raising costs for domestic producers, these levies reduce supply, affect production and weaken the competitiveness of exports. This effect offsets, at least in part, the reduction in the deficit that comes from lower imports.
The second channel has to do with the prices of final and capital goods. Tariffs on consumer and investment products tend to raise prices, which dampens demand for imports and reduces the trade deficit. However, the impact depends on the ability of consumers to substitute imported products with domestic alternatives and the reaction of foreign producers to the new prices.
The third channel goes through the exchange rate. Tariffs influence capital flows and currency prices. If tariffs reduce demand for imports and, by extension, foreign currency, the dollar may strengthen. A stronger dollar makes U.S. exports more expensive and imports cheaper.
That move may amplify the negative impact of higher input costs or neutralize some of the deficit reduction associated with higher prices of final goods. This effect is reinforced by the dominant role of the dollar in global trade billing, which limits adjustments via exchange rate.
Overall, the 2025 data show a high goods trade deficit, but with a different dynamic. The tariffs did not correct the structural imbalance in US foreign trade, although they did influence its pace and composition. The result is a contained, not reduced, deficit in a context marked by political uncertainty, business adjustments and a global economy still in transition.
