The Trade Deficit Delusion: Why Tariffs Will Not Make America Great Again

This study analyses the protectionist trade policies of the Trump Administration, focusing on tariffs' impact on the US trade deficit and broader economic consequences for its trade partners. By highlighting five stylised facts characterising the US economy, the analysis shows that the trade deficit primarily arises from the persistent gap between national saving and domestic investment, rather than unfair foreign trade practices. Using open economy accounting, the study demonstrates that tariff policies are ineffective for correcting trade imbalances and could exacerbate them, negatively affecting both US and European economies through disrupted trade flows, increased economic uncertainty, and instability in financial markets. The study also explores several possible scenarios resulting from these policies and suggests that protectionist measures represent an "impossible theorem" for rebalancing trade deficits and pose significant risks also for the economic stability of US trade partners.