Economic uncertainty looms amid rising trade deficit, tariff concerns

Philadelphia Federal Reserve President Patrick Harker, as quoted in The Wall Street Journal: "None of us in the profession can say for sure what's going to happen."

With the deadline for activation fast approaching, the dominant narrative in the media still pertains to tariffs. And this voluminous narrative shows no signs of cresting. I expressed my fundamental disdain for tariffs in my last column (Assessing the U.S. motor vehicle market amid potential tariffs, Feb. 17, Page 8), but at the time I wrote that column, the prospect of their actual implementation still seemed improbable to me. Now the risks associated with sweeping tariffs appear much more likely.

So at the risk of just adding to the noise, I will offer some additional thoughts as well as some actual data that I deem relevant to the debate.

My chart for this month is a graph of the U.S. trade deficit in goods. Before I analyze the latest trends in this data, allow me to offer some historical context in order to help explain my interpretation of the dilemma we currently face.

The U.S. ran a large trade deficit in goods since well before China gained admittance to the World Trade Organization in the late 1990s, but as anybody in the manufacturing sector can attest, the trade deficit started to expand rapidly once the Chinese entered the picture. As a result, there was a lot of rhetoric about reshoring and bringing manufacturing jobs back to America and such, but to little avail.

The gaping deficit hit a plateau following the Great Recession in 2009, but it started to expand rapidly again after the pandemic-induced shutdown. The deficit ballooned by a sizable 13 percent in 2024 when compared with 2023. And as we all know, Donald Trump won the election by promising to fix this problem and "Make America Great Again."

As 2025 began, we started to hear reports of companies stockpiling goods ahead of the proposed tariffs, but I had no idea what that meant exactly. Now that I have seen the data from January, I still have trouble processing it. The latest data on the U.S. trade deficit in goods is from January, and it shows that the trade deficit skyrocketed by just over $150 billion. This is not an annualized figure. It is $150 billion just for the month of January.

That is the largest monthly deficit in history — by a lot. Keep in mind that the tariffs really did not exist in January, but the anticipation of them caused the trade deficit data to go hyperbolic. With the bulk of the tariffs scheduled to go into effect in April, I cannot imagine what the deficit figures for the months of February and March will look like.

As I sit here in the latter half of March, the data so far in 2025 irrefutably indicates the stock market is in decline and the trade deficit is exploding. The president and his administration want us to believe this is a case of short-term pain that will eventually turn around and produce long-term gain.

I know of no historic precedent to indicate this will actually happen. I have heard no credible economics-based argument or reasoning that supports this policy. But to be fair, I have not seen or heard any better ideas for solving the problem.

The long-term U.S. trade deficit, particularly with China, weakens our national security. I believe the same is true for our federal budget deficit and our burgeoning national debt levels. Policymakers in Washington have talked about these issues most of my lifetime, but the data indicates the problem just continues to get worse.

I do not have access to the president's inner circle, but the best hypothesis I can produce is that the objective of his policies is to keep the Chinese government in check and to strengthen America's position in the world's political and economic affairs.

In order to accomplish this mission, American markets need greater access to rare minerals and cheap energy. The economy must also be weaned off of cheap imported goods and excess government spending.

Those are laudable goals. But it is an open question as to whether the markets and the electorate will respond in such a way that accomplishes these goals. Even if this current tariff policy could be effective at producing the desired results — and at this time that is still a big "if" — it will not happen quickly. And the American electorate has been known to have a short attention span.

Are Americans willing to endure a trade war, a stock market crash, a major reduction in government spending, higher inflation and higher interest rates all in an effort to resolve our long-term problems with the budget deficit, the trade deficit, and government debt?

Any of these shocks to the economy could be enough to push us into a recession and a corresponding rise in unemployment. That is a lot of pressure, but there is a rising probability that is where the economy is heading. At this point, all I can do is monitor the data and search for signals indicating how the market is responding.

To close, I will reiterate my disdain for most policy-based solutions to most market-based problems. Americans could achieve the stated goals of strengthening our national security and economy by making better choices in how they allocate their household resources. As consumers, we could curtail our purchases of cheaper imported goods, especially those manufactured in China. And as citizens, we could stop demanding so many government services, even those for which we think we have already paid. These are free market solutions. They are both dependable and durable, and they have the added bonus of not generating the amount of political division that big policy initiatives seem to generate.

At least in the near term, the tariff policy is most certainly negative for some segments of the plastics industry such as resin producers. It is also quite negative for many other end markets such as agriculture and motor vehicles.

But for now, it looks like we are going to try to achieve our national strategic objectives with an unprecedented change in policy. All I can say is stay tuned.