Trump’s tax bill conflicts with Trump’s trade goals

President Donald Trump says chronic U.S. trade deficits are a national emergency. His tax bill will make them worse.

The Senate began voting Saturday on the president’s signature legislation, which would extend his 2017 tax cuts and fund enhanced immigration enforcement.

Subscribe to The Post Most newsletter for the most important and interesting stories from The Washington Post.

Though the measure would slash social programs such as Medicaid, it is expected to add trillions of dollars to the national debt. The House-passed version of the bill would cost $3.4 trillion in increased federal deficits over the next decade, according to the nonpartisan Congressional Budget Office.

Because the government would need to borrow more money to cover that shortfall, interest rates would likely rise. A stronger dollar – a side effect of higher rates – would make U.S. exports more expensive and encourage Americans to buy imports, producing a wider trade gap, economists said.

“If you take Trump at his word that the persistent trade deficit is an economic emergency, then you couldn’t possibly endorse this,” said Benn Steil, director of international economics for the Council on Foreign Relations in New York. “This is clearly pushing in the direction of further persistent, and indeed, higher trade deficits.”

The White House insists the legislation that the president markets as “One Big Beautiful Bill” – combined with deregulation and greater energy production – will reduce cumulative deficits by trillions of dollars and put the nation’s “finances on a healthier trajectory,” according to a report by Stephen Miran, the head of the White House Council of Economic Advisers.

The legislation “is going to deliver a historic budget deficit reduction by cutting waste, fraud, and abuse in mandatory spending and turbocharging economic growth to increase tax revenue,” said Kush Desai, a White House spokesman.

But the White House math ignores the cost of extending the 2017 tax cuts, and its claims have drawn sharp criticism from several nonpartisan groups, including the Committee for a Responsible Federal Budget, which said the CEA analysis was “based on fantasy growth assumptions.”

The higher budget deficits that economists are forecasting could be the Achilles’ heel of the president’s effort to reshape global trade.

In April, Trump declared “a national emergency” as he unveiled the highest U.S. tariffs in more than a century, saying they were needed to counter unfair practices that cost American jobs. Treasury Secretary Scott Bessent has described the president’s goal as curing chronic imbalances in the global economy that revolve around the United States and China.

The United States has run an annual trade deficit every year since 1975, while China and a handful of other nations such as Germany, Japan, South Korea, Singapore and Taiwan typically enjoy a surplus.

In effect, the current global economic system relies on the United States to act as the consumer of last resort and absorb the excess production of goods in countries like China.

Beijing subsidizes production of many goods beyond what Chinese consumers can afford, helping propel exports. The lack of an adequate retirement system also compels the typical Chinese citizen to save for their nonworking years rather than spend today, which explains why consumption accounts for just 38 percent of gross domestic product in China.

Americans, by contrast, consume more than they produce and invest more than they save: Consumption in the United States equals 68 percent of GDP. Imported goods and money make up the difference. The value of the dollar, which has generally been strong since the 2008 financial crisis, also contributes to chronic trade deficits by making American exports expensive for foreign buyers and making imports relatively cheap for Americans.

Bessent acknowledges that the U.S., as well as China, needs to change. Last year, he advised then-candidate Trump on an economic plan that included driving the budget deficit down to 3 percent of GDP, less than half its current level. He told reporters last week that faster economic growth coupled with spending cuts would improve the deficit outlook.

“This status quo of large and persistent imbalances is not sustainable. It is not sustainable for the United States, and ultimately, it is not sustainable for other economies,” Bessent said in an April speech.

Not all economists are convinced. Both Dean Baker of the Center for Economic and Policy Research, a left-of-center Washington think tank, and Doug Holtz-Eakin of the right-of-center American Action Forum, said the imbalances that trouble Bessent are not worrisome.

“I don’t see the harm,” said Holtz-Eakin, who added that closing the trade deficit would require tougher action on the budget than the administration has proposed.

Global imbalances also were more extreme in the past.

In 2006, the U.S. current account, the broadest measure of the nation’s international transactions, hit a record deficit of 6.3 percent of the economy. But it was less than half that figure from 2009 until the pandemic, according to the Commerce Department.

Likewise, China’s corresponding surplus was around 2 percent of GDP last year, down from a peak of 10 percent in 2007, according to the International Monetary Fund.

There already have been some early signs of needed rebalancing. European governments, for example, have committed to increase spending on defense and infrastructure projects.

Still, there are at least two reasons now to remake the lopsided global economy, other economists said. China’s reliance on exports to fuel its recovery from a real estate bubble threatens to flood other markets with low-cost goods, costing workers in those countries their jobs.

Both the Biden and Trump administrations have warned of a second “China shock” akin to the emergence of Chinese manufacturing power in the early 2000s. With the U.S. imposing new tariffs, Chinese goods are being diverted to other markets. In the past year, the European Union, India and Canada have responded with their own new taxes on Chinese imports.

China’s trading partners are unlikely to tolerate an indefinite increase in that nation’s dominance of global markets.

Equally unsustainable is the outlook for the U.S. government’s finances.

The U.S. budget deficit last year hit 6.4 percent of total output – unusually high given that the economy was operating at or near full employment. CBO expects the deficit to hover around 6 percent for the next decade, evidence that import-hungry Americans will continue living beyond their means.

Just since the pandemic, Washington has added nearly $12 trillion to the national debt, as much as all government borrowing between 1790 and 2012.

The conflict between Trump’s tax and trade policies mirrors what occurred during his first term. After passage of his 2017 tax cut, the budget deficit as a percentage of GDP widened from 3.1 percent in 2016 to 4.6 percent in 2019. The trade deficit also increased for the two years following the bill’s passage, before the pandemic upended the economy.

“There is a disconnect, an incoherence between the stated desire of the administration to reduce and resolve global imbalances and what it’s proposing to do with fiscal policy. The macroeconomic policies and trade policies are rowing in different directions,” said Richard Samans, a nonresident senior fellow at the Brookings Institution.

To be sure, other forces could also affect how much the budget deficit sways the trade imbalance. The expected rise in the dollar’s value, for example, could be muted if investors shy from the U.S. currency out of concern over White House policies.

Trump’s frequent remarks about replacing Federal Reserve Chair Jerome H. Powell with a supporter of lower interest rates, for example, have sparked widespread concern among global investors and may explain the dollar’s decline of more than 11 percent this year, said economist Mary Lovely of the Peterson Institute for International Economics.

“It really depends on Trump. It really is about confidence and trust in the U.S. government and in the U.S. dollar,” she said.

Even those who agree that global imbalances are a problem say the administration is using the wrong tools to address them.

The president is relying on the highest tariffs since the 1930s to shrink the trade deficit, return manufacturing jobs to the United States and spur a “blue-collar boom.”

But the trade deficit is determined by broad economic forces such as the level of national savings, not individual trade barriers, according to most mainstream economists. Tariffs on key inputs such as steel also raise costs for businesses that use industrial metals, hurting prospects for factories that employ far more workers than the mills do, said Maurice Obstfeld, an economics professor at the University of California at Berkeley.

“We’re going in exactly the wrong direction because we’re increasing the fiscal imbalance, which is already dangerous, and we’re harming the real economy through tariffs,” said Obstfeld, a former IMF chief economist.

Related Content

Lights! Camera! But not enough action in a fading, worried Hollywood.

Facing entry-level job crunch, new grads question the value of a degree

Dynamite outside a synagogue: Civil rights stories imperiled by federal cuts