Tariffs Fail to Close Trade Gap
In April 2025, President Donald Trump unveiled what he called "Liberation Day," pledging that steep new import taxes would cut the country's trade gap, which he framed as a national emergency. Seventeen months on, that gap has only widened, hitting its biggest size since the levies took effect. Bureau of Economic Analysis figures show the deficit climbing 13.7% between July and August to $105.6 billion, the largest reading since March 2025's $140 billion. Purchases from abroad rose 4.3% to $420.8 billion, while sales overseas grew 2.2% to $205.7 billion.[S1]
Economists trace much of the expanding shortfall to the artificial intelligence boom, which has driven enormous American appetite for foreign-made hardware and pushed imports upward. The Federal Reserve Bank of Minneapolis calculated that AI-related demand by itself accounted for $200 billion of the U.S. trade gap in April. Tarek Hassan, an economics professor at Boston University, told Fortune that America's strength in fields such as AI draws overseas capital, something he regards as a plus. Tariffs, though, have anchored Trump's second term, sold on pledges of factory jobs and revenue that never arrived.[S1]
Volatility Undermines Tariff Effectiveness
What has kept the tariffs from narrowing the trade gap is less their magnitude than their near-constant shifting. Duties on Chinese goods, for example, jumped to 145% after Liberation Day, then dropped to roughly 30% once the Supreme Court struck down levies imposed under the International Emergency Economic Powers Act (IEEPA) and trade deals followed. Firms usually rework supply chains when tariffs change, yet the unpredictable landscape has deterred lasting adjustments, so American companies remain deeply dependent on foreign goods. Hassan said the churn leaves businesses repricing rather than rethinking, which makes the whole tariff regime ineffective.[S1]
Donald Boudreaux, who teaches economics at George Mason University, said the AI boom does double duty: it lifts demand for imported intermediate inputs such as hardware components, and it fosters optimism among U.S. firms about future productivity. That confidence leads importers to keep purchasing tariffed goods even at steeper prices. Boudreaux told Fortune that companies feel good about the American economy and will absorb higher costs for imported inputs because they expect future demand to cover them.[S1]
Trade Deficit as a Sign of Strength
Boudreaux sees the ongoing flow of foreign capital into the United States as a reason the trade gap can be a plus. Economists such as Peter Navarro contend that shrinking the deficit would stop American manufacturing from being hollowed out, but Boudreaux argues that taking in more foreign goods sends dollars back home via global purchases of U.S. equities, strengthening the economy. He said Trump treats the deficit as plainly bad, while in his own view it is plainly good, reflecting a healthy American economy rather than a problem.[S1]
Hassan warned that if Trump genuinely aims to eliminate the trade deficit, he should watch what he asks for. As overseas investors keep channeling dollars into the U.S., including via Treasuries, they supply Americans with inexpensive credit. Were the deficit erased and exports to outpace imports, that foreign money would dwindle, bond yields would climb, and funding the growing national debt would grow even tougher. Hassan said a closed deficit would amount to a crisis if it happened because foreigners refused to lend more, likening complaints about the deficit to grumbling about something helpful.[S1]
