Why Tariffs Aren’t Shrinking the U.S. Trade Deficit
Wall Street Journal
Feb-23-2026
President Trump is doubling down on his tariffs, even though they have so far failed to achieve one of their key stated goals: rebalancing lopsided global trade.
On the contrary, recent data show the tariffs that the Supreme Court struck down on Friday and that Trump has vowed to reimpose under a different statute are cementing these imbalances.
From Berlin to Tokyo, the world’s biggest exporting countries have reacted to U.S. tariffs by further committing to economic policies that support exports, subsidizing manufacturers to help them leap over the tariff wall.
As for America, it very much remains the world’s importer of last resort. The U.S. trade deficit in goods rose to a record high of $1.24 trillion in 2025, driven by a 4.3% increase in goods imports, according to data published Thursday by the Census Bureau.
Big exporting countries—Germany, Japan, South Korea, Taiwan and others—have launched government spending programs that are largely tilted toward supporting manufacturers dependent on overseas markets.
These aim to lower the cost of energy, transportation and capital, making it cheaper and more efficient for businesses to produce and export goods, partly offsetting the competitiveness hit from the Trump tariffs.
They are among the reasons that global growth and trade flows have held up better than expected over the past 11 months.
In Japan, Prime Minister Sanae Takaichi’s recent spending package of 21.3 trillion yen, equivalent to $136 billion, came with a high-profile proposal to cut the consumption tax, which could spur Japanese imports. But large parts of the fiscal plan double down on industrial subsidies.
South Korea recently provided 25 trillion won, or about $17.5 billion, in liquidity to exporters to help them bridge the gap caused by tariff shocks. Taiwan provided export-related credit guarantees designed to mitigate tariff shocks and trade turbulence, directly providing credit support to exporters and small and midsize businesses.
In Germany, a spending plan amounting to roughly 1 trillion euros, or about $1.2 trillion, is being mainly targeted at supporting manufacturers while Berlin is also subsidizing companies’ energy bills to make them more competitive abroad.
“There’s clearly still the idea that Germany has an export-led model,” said Marcel Fratzscher, president of the economic research institute DIW Berlin. German officials “want to stick to it and essentially protect industry,” especially older energy-intensive ones, he added.
Governments in countries including China, Germany and South Korea have historically regarded foreign surpluses as a source of strength. Consumption-fueled growth is seen, at best, as peculiarly American and, at worst, as decadent.
“Many of these countries can’t afford to allow their trade surpluses to come down, so when the costs to export to the U.S. rise, they have to lower the cost domestically,” said Michael Pettis, nonresident senior fellow at the Carnegie Endowment for International Peace.
The subsidies are typically financed by transfers from households, Pettis said, which ultimately reduces domestic demand and consumption further.
“They’re all trying to beat each other by lowering wages and subsidizing exports, but if we all do that, total growth will go down, not up,” he said.
Germany’s current-account surplus appears to be stabilizing at around 5% of gross domestic product, down from 8%-plus just before the pandemic. The decline partly reflects higher spending on energy imports because Germany can no longer rely on cheap Russian gas.
Yet such a surplus is still higher than its fair value—a measure based on the country’s demographics and economic development—which the European Commission estimates at around 1% to 2% of GDP.
Although German exports to the U.S. fell 9.4% last year, the U.S. remains Germany’s largest export market. Germany’s trade surplus with the country is still a sizable €51.9 billion.
German Chancellor Friedrich Merz said over the weekend that he hoped the Supreme Court ruling would result in lower U.S. tariffs for the European Union; they were set at 15% for most goods under an agreement reached last year. He said he would address the issue when visiting Trump next month.
China’s current-account surplus is expected to reach 4.3% of GDP this year amid surging exports and weak domestic demand, according to Goldman Sachs. Meanwhile, the U.S. current-account deficit is running at about 4% for the latest 12-month period, roughly double its level in 2019.
In an unusually strongly worded rebuke, the International Monetary Fund on Wednesday urged China to reorient its economy toward consumption and scale back “unwarranted industrial policy” to “mitigate international spillovers.”
The large U.S. current-account deficit means that the U.S. borrows from abroad to sustain domestic growth. Its scale partly reflects America’s much faster recovery from the pandemic than other countries, said Gian Maria Milesi-Ferretti, a senior fellow at the Brookings Institution in Washington.
While that caused spending and investment to run ahead of income, this isn’t necessarily negative, he added. For instance, investment in data centers widens the deficit in the short term because chips are largely imported, but it could also boost growth and productivity in the future.
If the U.S. still wants to reduce its deficit, he argued, reining in its large fiscal deficits would be more effective than coercing other countries into importing more U.S. goods, but there is no sign of this happening.
The case of Germany shows how hard it is to rewire entrenched economic models: Economists hoped that the country’s roughly €1 trillion government spending plan over the next few years would boost German imports, supporting growth in the rest of Europe. Yet for German politicians, the plans are a way to reinvigorate the export machine.
Berlin has also moved ahead with electricity price cuts for businesses but has yet to implement such a cut for households. And Merz has urged Germans to work longer, which could lower labor costs, making exporters more competitive on global markets.
Germany’s foreign surpluses are popular at home. Buoyant exports helped Germany to eliminate the mass unemployment of the early 2000s and sail through successive crises relatively unscathed.
The southern state of Baden-Württemberg grew rich after World War II by exporting high-tech machinery and autos to the world. Porsche, Mercedes-Benz and Bosch are based in or close to the state capital, Stuttgart. Many local manufacturers export 80% to 90% of the goods they produce.
Politicians and manufacturers there aren’t talking about ditching the export model. On the contrary: State economy minister Nicole Hoffmeister-Kraut and her colleagues recently rolled out fiscal measures designed to protect and promote the state’s export-driven economy. In November, she led a delegation of local business leaders to Florida and Georgia to strengthen economic ties in high-tech sectors.
Germany’s export model needs to be fine-tuned, not thrown out, she said.
Across town, Arnd Franz, CEO of Mahle, an auto supplier with around 12 billion euros in annual revenue, said Germany needs to improve the business environment for exporters by lowering energy costs and taxes, improving infrastructure and reducing bureaucracy.
“If Germany does its homework, it can be the same economic model,” Franz said.
Feb-23-2026
President Trump is doubling down on his tariffs, even though they have so far failed to achieve one of their key stated goals: rebalancing lopsided global trade.
On the contrary, recent data show the tariffs that the Supreme Court struck down on Friday and that Trump has vowed to reimpose under a different statute are cementing these imbalances.
From Berlin to Tokyo, the world’s biggest exporting countries have reacted to U.S. tariffs by further committing to economic policies that support exports, subsidizing manufacturers to help them leap over the tariff wall.
As for America, it very much remains the world’s importer of last resort. The U.S. trade deficit in goods rose to a record high of $1.24 trillion in 2025, driven by a 4.3% increase in goods imports, according to data published Thursday by the Census Bureau.
Big exporting countries—Germany, Japan, South Korea, Taiwan and others—have launched government spending programs that are largely tilted toward supporting manufacturers dependent on overseas markets.
These aim to lower the cost of energy, transportation and capital, making it cheaper and more efficient for businesses to produce and export goods, partly offsetting the competitiveness hit from the Trump tariffs.
They are among the reasons that global growth and trade flows have held up better than expected over the past 11 months.
In Japan, Prime Minister Sanae Takaichi’s recent spending package of 21.3 trillion yen, equivalent to $136 billion, came with a high-profile proposal to cut the consumption tax, which could spur Japanese imports. But large parts of the fiscal plan double down on industrial subsidies.
South Korea recently provided 25 trillion won, or about $17.5 billion, in liquidity to exporters to help them bridge the gap caused by tariff shocks. Taiwan provided export-related credit guarantees designed to mitigate tariff shocks and trade turbulence, directly providing credit support to exporters and small and midsize businesses.
In Germany, a spending plan amounting to roughly 1 trillion euros, or about $1.2 trillion, is being mainly targeted at supporting manufacturers while Berlin is also subsidizing companies’ energy bills to make them more competitive abroad.
“There’s clearly still the idea that Germany has an export-led model,” said Marcel Fratzscher, president of the economic research institute DIW Berlin. German officials “want to stick to it and essentially protect industry,” especially older energy-intensive ones, he added.
Governments in countries including China, Germany and South Korea have historically regarded foreign surpluses as a source of strength. Consumption-fueled growth is seen, at best, as peculiarly American and, at worst, as decadent.
“Many of these countries can’t afford to allow their trade surpluses to come down, so when the costs to export to the U.S. rise, they have to lower the cost domestically,” said Michael Pettis, nonresident senior fellow at the Carnegie Endowment for International Peace.
The subsidies are typically financed by transfers from households, Pettis said, which ultimately reduces domestic demand and consumption further.
“They’re all trying to beat each other by lowering wages and subsidizing exports, but if we all do that, total growth will go down, not up,” he said.
Germany’s current-account surplus appears to be stabilizing at around 5% of gross domestic product, down from 8%-plus just before the pandemic. The decline partly reflects higher spending on energy imports because Germany can no longer rely on cheap Russian gas.
Yet such a surplus is still higher than its fair value—a measure based on the country’s demographics and economic development—which the European Commission estimates at around 1% to 2% of GDP.
Although German exports to the U.S. fell 9.4% last year, the U.S. remains Germany’s largest export market. Germany’s trade surplus with the country is still a sizable €51.9 billion.
German Chancellor Friedrich Merz said over the weekend that he hoped the Supreme Court ruling would result in lower U.S. tariffs for the European Union; they were set at 15% for most goods under an agreement reached last year. He said he would address the issue when visiting Trump next month.
China’s current-account surplus is expected to reach 4.3% of GDP this year amid surging exports and weak domestic demand, according to Goldman Sachs. Meanwhile, the U.S. current-account deficit is running at about 4% for the latest 12-month period, roughly double its level in 2019.
In an unusually strongly worded rebuke, the International Monetary Fund on Wednesday urged China to reorient its economy toward consumption and scale back “unwarranted industrial policy” to “mitigate international spillovers.”
The large U.S. current-account deficit means that the U.S. borrows from abroad to sustain domestic growth. Its scale partly reflects America’s much faster recovery from the pandemic than other countries, said Gian Maria Milesi-Ferretti, a senior fellow at the Brookings Institution in Washington.
While that caused spending and investment to run ahead of income, this isn’t necessarily negative, he added. For instance, investment in data centers widens the deficit in the short term because chips are largely imported, but it could also boost growth and productivity in the future.
If the U.S. still wants to reduce its deficit, he argued, reining in its large fiscal deficits would be more effective than coercing other countries into importing more U.S. goods, but there is no sign of this happening.
The case of Germany shows how hard it is to rewire entrenched economic models: Economists hoped that the country’s roughly €1 trillion government spending plan over the next few years would boost German imports, supporting growth in the rest of Europe. Yet for German politicians, the plans are a way to reinvigorate the export machine.
Berlin has also moved ahead with electricity price cuts for businesses but has yet to implement such a cut for households. And Merz has urged Germans to work longer, which could lower labor costs, making exporters more competitive on global markets.
Germany’s foreign surpluses are popular at home. Buoyant exports helped Germany to eliminate the mass unemployment of the early 2000s and sail through successive crises relatively unscathed.
The southern state of Baden-Württemberg grew rich after World War II by exporting high-tech machinery and autos to the world. Porsche, Mercedes-Benz and Bosch are based in or close to the state capital, Stuttgart. Many local manufacturers export 80% to 90% of the goods they produce.
Politicians and manufacturers there aren’t talking about ditching the export model. On the contrary: State economy minister Nicole Hoffmeister-Kraut and her colleagues recently rolled out fiscal measures designed to protect and promote the state’s export-driven economy. In November, she led a delegation of local business leaders to Florida and Georgia to strengthen economic ties in high-tech sectors.
Germany’s export model needs to be fine-tuned, not thrown out, she said.
Across town, Arnd Franz, CEO of Mahle, an auto supplier with around 12 billion euros in annual revenue, said Germany needs to improve the business environment for exporters by lowering energy costs and taxes, improving infrastructure and reducing bureaucracy.
“If Germany does its homework, it can be the same economic model,” Franz said.
