Guest commentary: Trade, the trade deficit and the tariff rollercoaster
By Gerhard Apfelthaler
California Lutheran University
Surprise, surprise! The U.S. trade deficit dropped sharply in June 2025.
According to a recent report by the Bureau of Economic Analysis, the goods-and-services deficit fell to around $60 billion, down nearly 16% month-over-month and 18% year-over-year. And more good news – by July, year-over-year receipts in tariff revenue increased by a whopping 131% year-over-year to $127 billion by July.
At first glance, the roller coaster ride that is the United States’ policy of shifting tariffs seems to be doing its job. However, there’s more to the story than meets the eye: A look at the cumulative figures for the first six months of 2025 shows that the trade deficit is still up by almost 40% compared with the same period in 2024, reflecting imports growing faster than exports.
This raises a critical question — are tariffs really addressing the imbalance, or have we just experienced a random, temporary dip in June?
Has the trade deficit in the first half of the year increased because U.S. companies were stockpiling their warehouses in fear of prohibitively high import tariffs?
It’s tempting to connect two dots: tariffs go up, trade deficit goes down, case closed.
In a National Bureau of Economic Research report from April 2025, economists Ivan Werning and Arnaud Costinot caution that the relationship isn’t that clear-cut.
Their research shows that tariffs can be neutral or even reduce deficits, but only under certain conditions — when consumers treat imported goods as luxuries. Or, in other words, when consumers decide that everything foreign is too expensive and turn to domestic alternatives.
Still sounds good?
The problem is that there may be no alternatives, that domestic alternatives may be inferior, and that — shielded from foreign competition — U.S. companies will become less innovative and less efficient. Elevated domestic prices and diminished real consumption follow, potentially undermining the standard of living. Besides, tariffs raise input costs for US exporters, foreign countries will retaliate, and U.S. exporting companies will start disappearing from world markets. These long-term effects are far more important than any short-term gains.
And we’ve been there before: The 2002 steel tariffs, designed to protect U.S. mills from imports, raised domestic steel prices by as much as 30%.
While a handful of producers benefited, downstream industries — automakers, appliance manufacturers, and construction firms — absorbed higher costs. Studies at the time concluded that these tariffs imposed a net welfare loss, with more U.S. jobs lost in steel-consuming sectors than saved in steel-making.
The automotive sector illustrates another wrinkle. Vehicles and auto parts are among America’s largest imports, but also key exports.
Tariffs on imported vehicles and components aim to spur domestic production, but the globalized nature of supply chains makes this a double-edged sword.
A tariff on German or Japanese cars doesn’t just penalize foreign producers; it also raises input costs for U.S. assembly plants reliant on imported parts.
Research on tariffs during the first Trump administration showed that while some U.S. automakers gained temporary breathing room, others faced squeezed margins, and consumers faced higher sticker prices. Worse, retaliation followed: the European Union targeted U.S. car exports, offsetting much of the supposed “gain.”
If tariffs narrow the automotive trade deficit at all, they risk doing so by pricing Americans out of the very cars they want to buy — ‘Buy American’ will not be the consumer’s choice, it will become the only option.
Agriculture underscores the retaliatory side of tariff wars in similar ways. When Washington raises barriers on steel or machinery, trading partners often strike back not in kind but where it hurts politically – soybeans, pork, dairy.
During the 2018–2019 trade tensions between the U.S. and China, American farmers bore the brunt of Beijing’s retaliation. Soybean exports to China collapsed, forcing Washington to roll out billions in farm aid. The pattern continues: higher tariffs in one sector invite retaliation in another, often agriculture, leaving America’s export strength undermined.
In the end, tariffs aimed at reducing the deficit can inflate it if export losses outweigh import reductions.
Things might look all too rosy in the short run while tariffs offer a temporary salve. But it’s a sugar-high that won’t last. Any reduction in trade deficits and increases in revenue from tariffs will come at the expense of long-term growth, innovation, productivity, and consumption.
Business leaders, economists, and policymakers must ask not just whether tariffs reduce deficits, but whether they do so without undercutting the broader economy and the very sectors that keep the U.S. competitive.
• Gerhard Apfelthaler is a professor and the dean of the School of Management at California Lutheran University
