The United States trade deficit: tariffs, the dollar’s dominance, and a broken balance
andrea.parisi | Published: 9 Apr 2025, 9:06 p.m.
In 2022, the United States of America (U.S.) ran a trade deficit of $951 billions, a staggering figure that underscores a persistent economic reality: the United States imports far more than it exports. Every year, dollars flow out to pay for electronics from China, cars from Germany, and clothing from Vietnam, effectively bleeding purchasing power to the rest of the world. This imbalance isn’t new: since the 1970s, the U.S. has consistently spent more abroad than it earns. In a simpler era, such a gap would have corrected itself naturally. Today, it doesn’t. Why? The answer lies in the collision of modern fiat money, the U.S. dollar’s unique status as the world’s reserve currency, and the blunt tool of import tariffs wielded to patch a deeper problem.
Import tariffs – like the levies imposed on Chinese goods in 2018 or the steel and aluminum duties carried over into the Biden administration, and finally the recent range of tariffs imposed by the U.S. to all trading partners – aim to stem the tide of imports and boost domestic production. They’re a response to a trade deficit that hit $375 billion with China alone in 2018, a gap that has fuelled political rhetoric and economic unease. But tariffs treat a symptom, not the cause. To understand why the trade imbalance persists – and why tariffs won’t fix it – we need to rewind to a time when money meant gold, and then fast-forward to the quirks of the dollar’s global dominance.
Imagine it’s the 1850s, and the U.S. operates, like all other countries around the world, under the classical gold standard. Every dollar is backed by a fixed amount of gold, and so are the currencies of its trading partners. If the U.S. imports more than it exports – say, buying British machinery while selling less cotton – gold ships across the Atlantic towards the U.K. to settle the difference. America’s gold reserves shrink, reducing the money supply. With less money circulating, prices fall: a U.S.-made plow that cost $10 drops to $8. Meanwhile, British goods, priced in pounds tied to gold, stay expensive. Foreigners snap up cheaper U.S.-made plows, U.S. consumers refuse costly imports, and trade swings back toward balance.
This was the beauty of the gold standard. A nation couldn’t run deficits indefinitely; the physical limit of gold forced adjustment: the system self-corrected. By 1900, global trade imbalances were rare and fleeting, tethered to the hard reality of bullion coins.
Fast-forward to today. The gold standard is gone, replaced since 1971 by fiat money – currencies backed not by metal, but simply forced on the citizens (at most, backed by faith in governments, whatever that might mean). In this system, trade imbalances should still resolve, just differently. Take the U.S. and China. Americans, like most of the Western world, buy loads of Chinese goods – phones, toys, solar panels – sending dollars to Beijing. Demand for Chinese yuan rises as those dollars are exchanged, pushing the yuan’s value up. A stronger yuan makes Chinese exports pricier (a $50 phone becomes $60) and U.S. goods cheaper abroad (a $5,000 tractor falls to $4,000 in yuan terms). Imports slow, exports rise, and the deficit shrinks. That’s the textbook story.
This natural rebalancing, however, is not happening: the U.S. trade deficit has ballooned, not balanced. Since 2000, it’s averaged over $500 billion annually, peaking at $1 trillion in 2022. The yuan and the Euro have not soared; the dollar has not fallen. Why? The answer isn’t in economics textbooks: it’s in the dollar’s outsized role on the world stage.
The U.S. dollar isn’t just America’s currency: it’s the world’s reserve currency. About 58% of global foreign exchange reserves are held in dollars, per the Bank for International Settlements’ 2023 data. Oil trades in dollars. International loans are denominated in dollars. When crises hit, investors flock to dollar-denominated assets. This reserve status creates artificial demand for the dollars, propping up its value even as the U.S. loses dollars through trade deficits.
When the U.S. buys goods abroad, these dollars do not re-enter back into the U.S. economy. Instead, (at least in part) they are stockpiled as foreign reserves. China holds more than $3 trillions in foreign reserves, much of it in dollar assets like U.S. Treasury bonds. Other nations do the same, from Japan ($1.1 trillion in reserves) to Saudi Arabia. The International Monetary Fund alone held 6.7 trillions of dollars in 2024. This hoarding keeps the dollar strong, preventing the depreciation that would make U.S. exports competitive and imports less appealing. In a "normal" fiat system, heavy importing would weaken the dollar, but the reserve buffer short-circuits that adjustment.
The U.S. response to such deficit, under Trump administration in 2018, was to target foreign imports, particularly China, with tariffs. The Biden administration kept many of those duties, adding its own on several goods including electric vehicles and batteries. The current tariffs spread follows the same logic: make imports costlier, and Americans will buy local. Alternatively, force foreign countries to accept U.S. exports. At least in theory, this should increase domestic jobs and narrow the trading deficit.
The reality, however, is more problematic. Tariffs have trimmed the U.S.-China deficit somewhat (down to $279 billion by 2023), but the overall trade gap remains high. That is because tariffs don’t address the dollar’s strength or the structural drivers of U.S. consumption, namely low savings rates (3% of income vs. China’s 30%) and high production costs. American firms face higher input costs coming from the production chains subjected to tariffs, passing them to consumers. Tariffs aim at the symptom, not at the root of the problem.
If the U.S. has an issue with importing goods, on the other hand it dominates in technology. The U.S. hosts seven of the world’s ten most valuable public companies, per market cap, even after the recent stocks fall: Apple ($2.7 trillion), Nvidia ($2.4 trillion), Microsoft ($2.7 trillion), and others that dwarf global rivals. These giants do not just profit: they shape industries, from chips to cloud computing, driving U.S. economic might. In AI, companies like OpenAI, Google, and xAI thrive in the U.S., unencumbered by Europe’s regulatory framework.
This innovation edge is real. U.S. tech exports (software, patents, services) hit $191 billion in 2022, per the U.S. Trade Representative. Silicon Valley’s output is a powerhouse. The S&P 500, heavy with tech, outpaces foreign indexes; the Nasdaq’s 2023-24 surge reflects bets on AI and beyond. And there are other private enterprises with global reach driving development (Cargill, Kingston, SpaceX, and others). America’s ability to create value from technology sets it apart, even as its factories lag.
Yet, the $951 billion goods deficit dwarfs tech exports. Apple designs iPhones in California, but they’re made in China; Nvidia’s chips power the world, but assembly happens abroad. Moreover, innovation doesn’t weaken the dollar: it strengthens it. Foreign investors pour into U.S. stocks and bonds, drawn by tech’s results. In 2023, net foreign purchases of U.S. assets hit $1.2 trillion, per Treasury data. This capital inflow reinforces the dollar’s reserve status, keeping it overvalued and keeping imports cheap. The very success of U.S. innovation feeds the imbalance it might seem to solve.
What if the dollar lost its reserve status? A 20-30% drop could improve exports and curb imports. The trade deficit might shrunk. Innovation could amplify this: a weaker dollar might supercharge tech exports, as U.S. AI and software get cheaper globally. However, it would be a double-edged sword. Tech giants lean on global supply chains: Apple’s uses China plants, Nvidia’s uses Taiwan factories. A weaker dollar hikes those costs, squeezing margins. Foreign investment might dry up too, owing to a depreciating currency, cooling the U.S. stock market. However, with 60% of global debt in dollars, the consequences of the dollar losing its reserve status would be harsh, and none of the actors is willing to take the burden. The U.S. has used the global status of the dollar as reserve currency to finance its ballooning public debt, currently at the stratospheric high of $38 trillions: being unable to refinance this debt would cause an unfathomable default that would plunge not just the U.S., but the whole world into a dramatic recession; foreign countries would see the value of their U.S. treasury bonds plummet, resulting in a extremely costly loss. No country would be spared the consequences.
The U.S. trade deficit is a complex tangle. The dollar’s reserve status freezes imbalances, tariffs aims at symptoms, and innovation shines but does not rebalance the books. If the discipline of the gold era is currently buried in our past, fiat money’s balance is highly skewed. The U.S. can lead AI and stock markets while leaking dollars on goods: it’s a split superpower. Innovation could narrow the gap if exports soared, but its dollar-boosting side effect undercuts that hope. Tariffs, currency shifts, and even tech and AI: they’re just pieces of this puzzle.
All of this explains the dramatic changes we are witnessing: the modifications to the world order, the withdrawal of support for Europe by the U.S., the pressure from emerging countries to abandon the dollar as reserve currency. These changes are likely to destabilize our current pacific understanding of how the world works. It is possible that at the end of an extended period of turmoil the dollar's reserve status will be inevitably destined to end, as some countries are already reducing their reserves albeit at a slow pace (with China leading the way), leading to a correction of current imbalances. It is not clear, though, what might replace the dollar in the future: whether a new currency, a return to the gold standard, or a new contender like Bitcoin, which would be independent of governmental reach. What is inevitable is that, one way or another, the imbalances created by this monetary system will either need to be corrected or will dramatically correct themselves.
