Trump's tariffs: Mind the trade gap

US tariffs have changed the geography of trade more than they have reduced the trade deficit or revived domestic manufacturing.

• The US goods deficit declined from 4.1% of GDP in 2024 to 3.5% over the past 12 months, while the overall deficit reached about 2.5% of GDP after including the services surplus.
• The headline improvement is overstated by special factors, including roughly $109 billion of net nonmonetary gold exports, the unwinding of pharmaceutical stockpiling, and stronger energy exports.
• The deficit with China fell by $131 billion and with the European Union by $120 billion, but this was offset by increases of $137 billion with Taiwan and $106 billion with Vietnam, alongside wider deficits with Thailand, Mexico, and Malaysia.
• Manufacturing employment has been broadly unchanged since January 2025, while manufacturing construction has declined as the earlier stimulus from the CHIPS Act and Inflation Reduction Act faded.
• Imports of computers, accessories, and semiconductors rose by $369 billion since 2024, exceeding the $246 billion increase in total US goods imports and reflecting the import-intensive AI data-centre boom.
• Tariffs have reduced passenger-car imports, sharply lowered the China deficit, and increased tariff revenue, but economists estimate they have added about 0.5–1% to consumer prices.

Takeaway: Tariffs can redirect trade and alter its composition, but they have so far struggled to reduce the overall US deficit or generate a manufacturing renaissance; the AI investment boom is working in the opposite direction, although it could eventually support US services exports.