Weekly Market Update

Tariffs Pose Risk to the US Deficit

In 2024, the US current-account deficit widened by 10.7%, driven by rising imports. While tariffs aim to reduce the trade imbalance, their long-term impact remains uncertain, with potential inflationary pressures and challenges for domestic production affecting growth.

15 November 2024 5 min read

Dane Smith

Head of North American Investment Strategy & Research

Saketh Reddy, CFA, CFA

Research Analyst, Investment Strategy & Research

Chris Carpentier, CFA, FRM

Senior Investment Strategist

Devin Foster

Zanub Raza

Fixed Income Portfolio Specialist

The US current-account deficit is the combined balance of trade in goods and services. The US has a long history of running a deficit, where purchases from abroad outnumber the amount exported, and it has continued its downward trajectory. The deficit widened by 10.7%, to $266.8 billion in the second quarter of 2024. The widening of the deficit reflects an increased reliance on imported goods, with goods trade contributing largely to the imbalance. The second-quarter deficit was 3.7% of current GDP, up from 3.4% in the first quarter.

One of the key components of Trump’s economic agenda is the use of tariffs, particularly on Chinese imports, to reduce the trade imbalance. Tariffs make imported goods more costly and encourage businesses and consumers to shift their demand to domestically produced goods. This would theoretically reduce the dependence on foreign goods, fostering domestic production and job growth.

However, the effectiveness of tariffs on the trade balance is quite complex and will have lasting implications. In the short term, tariffs have inflationary consequences. When the cost of imports rises, it is usually passed on to consumers, leading to higher prices and thus inflation. Over time, the magnitude of inflation will depend on whether domestic, or re-routed production can meet demand at competitive prices. If more local production cannot quickly scale up to meet demand, inflationary pressures may become more pronounced, potentially affecting the US consumer and, in turn, becoming a headwind to economic growth.

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