Analysis: Tariffs do not Improve the Trade Balance

There is no correlation between high tariffs and a positive trade balance.

Per Altenberg Strategic adviser

A central premise of US trade policy under the Trump administration is the idea that higher tariffs reduce the trade deficit. At first glance, this may seem logical. However, there is no correlation between high tariffs and a positive trade balance. In fact, a policy mix that includes higher tariffs is more likely to increase a country’s trade deficit rather than reduce it.

While tariffs could, in theory, affect the trade balance through their impact on domestic savings or investment, the direction of this effect is unclear. Other macroeconomic factors, such as budget deficits and capital flows, play a much greater role.

We analysed data on tariffs and trade balances from 168 countries between 2019 and 2022. The results show that in non-OECD countries, high tariffs are associated with trade deficits. For OECD countries, we find no correlation.

One possible reason for this pattern in developing countries is that high tariffs often coincide with macroeconomic conditions or policies that reduce domestic savings relative to investment, leading to a larger trade deficit. However, given the wide range of countries in the sample, we are cautious about drawing strong conclusions from the results.

Key Findings

  • Tariffs are not an effective way to improve a country's trade balance.
  • In developing countries, high tariffs are correlated with trade deficits.
  • In OECD countries, there is no clear link between tariffs and the trade balance.
  • Fiscal policies, private savings, and capital flows have a much greater impact on the trade balance than tariffs.
  • Reducing the US budget deficit or encouraging investment abroad would be more effective in lowering the trade deficit than raising tariffs.
  • Since a trade deficit is balanced by a capital surplus, there is no inherent value in pursuing policies to improve the trade balance.

Overall, our analysis shows that raising tariffs is an ineffective method to improve a country's trade balance. To reduce a trade deficit, efforts should focus on strengthening public finances and promoting foreign investment rather than increasing tariffs.