The United States has maintained a persistent trade deficit with the rest of the world since 1976. The US trade deficit surged in the 1990s and early 2000s, peaking at over 5% of GDP in 2006. It declined after the 2008 financial crisis but has grown again recently.
Economists believe trade deficits primarily result from domestic consumption, saving and investment decisions, which are influenced more by fiscal and monetary policies than trade policies. If a country consumes more than it produces, the difference is filled by imported goods and services. When investment opportunities exceed savings, the shortfall is covered by capital inflows. There could be various reasons for these imbalances—both positive and negative.
Nonetheless, Donald Trump views international commerce as a zero-sum game. His obsession with tariffs reflects a deep-seated disdain for trade and trade deficits—he states, “Trade deficits hurt the economy very badly.” Throughout his tumultuous political career, Trump has insisted that much of what’s wrong with the US economy comes down to one factor: significant trade deficits. If only the US sold more to the rest of the world than it purchased abroad, Trump argues, the country would experience a considerable improvement. This would especially be true in manufacturing, as the argument goes, where the shift to foreign factories has cost millions of American jobs.
The economic realities of trade deficits
Economists view trade deficits in very different ways. Rather than acting as a scorecard of economic strength or weakness, the bilateral trade balance between two countries holds little significance from an economic perspective. A country’s overall trade balance with the rest of the world is far more relevant. However, it is unclear whether trade deficits are inherently harmful. Furthermore, most economists believe that a country’s balance of trade reflects its macroeconomic structure along with its fiscal and monetary policies, not its trade policies.
Whether the trade deficit genuinely poses a problem for the American economy remains debatable. Nonetheless, most economists oppose using tariffs to address the issue, arguing that higher tariffs could lead to increased inflation, reduced real wages, job losses, disruptions in the global economy and weakened relationships with allies. Additionally, it remains unclear how much higher tariffs would impact reducing the trade deficit, if any. A tariff is a tax on imports brought into a country. Paid by the importer, unless the importer absorbs the extra cost through lower profit margins, the cost is passed on to the final consumer.
If political power grows out of the barrel of a gun, as Mao Zedong once proclaimed, the same can be said about the general trade deficit in the United States. In this case, the weapon is American and wielded by Trump, who has a puzzling aversion to trade deficits, even though they have fueled the US economy for decades.
Four key historical events in US history are highlighted to understand the link between war and the trade deficit: the costly Vietnam War, Johnson’s Great Society programme, Reagan’s tax cuts, and the abandonment of the gold standard in 1971. These events, driven by Cold War defence spending, increased consumption and financing, significantly impacted the US economy, with the removal of the gold standard enabling more lavish government spending and the maintenance of a domestic military-industrial complex.
For several reasons, Trump’s proposed tariffs are unlikely to reduce the US trade deficit significantly. Firstly, targeted tariffs on specific countries could easily be circumvented or offset by other nations filling the market gap. Secondly, increased domestic prices resulting from tariffs would strengthen the dollar, making imports cheaper and exports more expensive. Thirdly, some imports remain cost-effective despite tariffs. Finally, tariffs would likely harm US exports due to increased production costs and foreign retaliation. Historical evidence, including Trump’s tariffs from 2018 to 2019 and research from the IMF, suggests tariffs have minimal impact on the trade balance. Instead, reducing the federal budget deficit would increase national savings and naturally decrease the trade deficit, ultimately promoting long-term economic prosperity and stability.
Lesotho is the hardest hit as new US tariffs rattle Africa.
The global fallout: A case study of Lesotho and Africa
Trump’s massive tariffs announced on dozens of nations were pitched as “reciprocal,” matching what other countries charge the United States, dollar for dollar, even considering non-tariff barriers like value-added taxes. However, the actual calculation the Trump administration used is not reciprocal. Instead, it employed a straightforward calculation: the country’s trade deficit divided by its exports to the US, multiplied by half. Washington’s “looney trade wars” have triggered a fireball: rattled global markets, strained diplomatic ties and inflicted disproportionate harm on smaller economies.
Lesotho is the hardest hit as new US tariffs rattle Africa. Washington imposed a 50% tariff on its imports, the highest for any single nation, citing it as “among the worst offenders.” Lesotho’s annual GDP of USD 2 billion heavily relies on exports, primarily textiles, including jeans. The country has 11 factories, most of which export goods to the US and provide employment to 12,000 workers. Other African countries impacted by Trump’s “reciprocal tariffs” above the new baseline rate of 10% include Madagascar (47%), Mauritius (40%), Botswana (37%), Equatorial Guinea (30%) and South Africa (30%).
The South African automotive sector, which accounts for 22% of exports to the US and has benefited from AGOA, will be among the worst hit. In 2024 alone, the US was the third-largest destination for South African vehicle exports, absorbing 6.5% of total shipments, equivalent to an estimated R35 billion annual export value. Without a cogent strategy or response, the Minister of Trade, Industry and Competition has called for an urgent meeting with US authorities to address the situation. Failure to secure continued preferential access would undermine one of South Africa’s most globally competitive industries and hand a geopolitical and economic victory to China, which stands to benefit most as global supply chains continue to shift in its favour.
Republican congressmen have demanded that Trump revoke South Africa’s AGOA membership, though some believe AGOA’s natural expiration in 2025 will be sufficient. The new tariff barrage signals the end of AGOA, reinforcing Trump’s preference for bilateral trade agreements over multilateralism. The implications extend beyond trade alone; US-Africa relations are increasingly uncertain, with many African leaders viewing Trump's actions as a shift toward economic nationalism at their core expense.
Nevertheless, Trump’s strategy is straightforward and may not be as complex as it seems. He aims to compel numerous states with the minerals the US requires to negotiate from a position of weakness. The US and the Democratic Republic of Congo are reportedly discussing a minerals agreement similar to the one it demands from Ukraine. Many within the US have called for AGOA reciprocity, and the recent developments indicate the evolving direction of AGOA post-2025. It will focus on minerals rather than preferential treatment; this seems to be the only basis for engagement with the US for countries still interested in AGOA. It is becoming clear that China is not present to offer them support, which is of significant concern.
Trump versus multilateralism and the World Trade Organisation
Trump once described NAFTA (now USMCA) as “the worst trade deal maybe ever signed anywhere” and also criticised the Trans-Pacific Partnership (TPP). Calling the move a “historic milestone,” he framed the tariffs as a means of reinforcing US economic sovereignty. However, economists warn that these tariffs could raise prices on goods like coffee and chocolate, increasing financial strain on consumers. Although Trump has not commented on AGOA as a preferential trade agreement (one-sided or no-reciprocal), it cannot survive the onslaught. US consumers will suffer more than exporting countries since some products and REE minerals cannot be easily replicated.
The WTO has been left adrift at the multilateral level due to Trump’s actions. His arbitrary imposition of tariffs on major trading partners and blatant violations of WTO rules suggest that the United States behaves like a rogue state in international trade. The WTO has been weakened for years. Starting in 2017, the United States began blocking all new appointments to the appellate body as the terms of its judges expired. A USTR representative accused the WTO of “interfering with US sovereignty.”
Trump’s tariffs raise WTO compliance concerns, contrasting with the US's historical shift from protectionism (Smoot-Hawley) to liberalisation (Reciprocal Tariff Act) and its leading role in establishing GATT and the WTO to lower global tariffs under the Most-Favoured-Nation rule. WTO members commit to tariff bindings, and exceeding these violates rules, allowing retaliation; developing nations have SDT flexibility. As new tariffs are implemented, WTO challenges will likely increase trade governance and reform tensions.
Now, without a functional appellate body, the WTO’s ability to mediate disputes is paralysed, casting doubt on global trade governance. Broader implications include a potential shift toward economic fragmentation, where regional trade blocs may emerge as a counterbalance to US trade policies. Furthermore, the US is unlikely to leave the WTO soon because the WTO is not expensive for Washington. The WTO’s total budget is relatively low (USD 227 million in 2024) compared to the WHO’s (USD 3.4 billion in 2024).
The tariffs could escalate trade tensions globally, harming the US and its trading partners. For example, China has imposed 34% reciprocal tariffs on imports of US goods in retaliation for Trump’s trade war. Beijing is well-positioned to challenge Trump’s tariffs because they effectively produce goods for the world. With Trump’s continued attacks on international trade institutions, the future of multilateralism remains uncertain. While Trump may not withdraw from the WTO, his actions undermine its authority. However, the real victims of his trade policies are smaller countries and American consumers, who will face the burden of higher costs and economic instability.
Siya yi banga le economy!
#Conviction
Get your news on the go. Click hereto follow the Conviction WhatsApp channel.
