On April 2, 2025, President Trump will announce what he calls a Reciprocal Tariffs Plan. Since inauguration, President Trump has shifted focus from across-the-board tariffs to reciprocity—aligning U.S. tariff rates with those put on U.S. goods by trade partners. As April 2 looms, this memo explains why balanced trade, not reciprocity in tariff rates, should be the goal. It also explains how, even if equalizing tariff rates is not the right approach, tariffs can be an effective tool to address global trade imbalances. We also posit how tariffs and other policy tools could be used to achieve a more balanced trade system and how this can deliver on goals that unite Americans across region and party.

The administration’s April 2 approach remains a mystery: Will the administration hike U.S. tariffs to mirror those in other countries or force countries to lower their tariff rates to match those charged by the United States? Treasury Secretary Scott Bessent has suggested that the goal is to negotiate to remove tariff and non-tariff barriers U.S. exports might face abroad, and if countries address U.S. concerns, “we will not put up the tariff wall.”² In contrast, National Economic Council director Kevin Hassett has acknowledged that “probably about 10 to 15 countries account for the entire trillion-dollar trade deficit” and suggested that tariffing the imports of these nations would be the primary target.³

Equalizing tariff rates will not remedy trade-related concerns of many Americans about reliable access to affordable goods needed by their families, availability of good jobs that foster economic security and strong communities, and a resilient, fairer country where more people can thrive, not just survive. Aligning tariff rates also will not fix policymakers’ concerns—large, chronic trade imbalances and other nations’ unfair trade practices that hollow out U.S. manufacturing; vulnerabilities caused by production concentrated in too few nations; and rising income inequality, deaths of despair, and political rage. National resilience and security have been weakened by the loss of 90,000 U.S. factories and millions of industrial jobs in recent decades. In crushed factory towns nationwide, an epidemic of “deaths of despair” of working-age Americans is reducing national life expectancy rates. The only way to rebalance the global economy is to target the imports of major export-driven nations that use mercantilist policies to export far more than they import.

How Did We Get to a $1 Trillion U.S. Goods Trade Deficit?

Since the 1970s, the United States has run an ever-expanding and now huge persistent negative trade balance with the rest of the world—the largest persistent trade deficit in history. The trade balance, or more precisely the current account balance, is one side of a nation’s balance of payments. (The current account includes the balance of trade plus incoming earnings on foreign investments (dividends) and similar outgoing payments to foreigners related to U.S. investments.) The financial account, reflecting international financial flows, is the other side. The current account and the financial account mirror each other. Thus, when a country has a negative trade balance, it will have a positive financial account balance, meaning it absorbs more money from the rest of the world than it transfers out.

This is necessary for a nation with a trade deficit to pay for imports not covered by the proceeds of its exports.

Many factors contribute to the persistent U.S. trade deficit. Among those that are widely understood are (i) propagation of the hyperglobalization/neoliberal ideology including as implemented through the mid-1990s World Trade Organization (WTO) and North American Free Trade Agreement and similar trade policies, include Congress’ grant of Permanent Most Favored Nation status to China in 2000 as part of China’s WTO accession; (ii) the near-elimination of most U.S. tariffs and significant tariff reduction worldwide since the post-war period; and (iii) the emergence of China as a huge manufacturing powerhouse through myriad mercantilist policies (other countries play a similar role as China, albeit at a smaller scale).

Less broadly recognized but also root causes are: (iv) the demise of the gold standard in the 1970s due to Nixon’s unilateral decision to end dollar-gold convertibility, which within a few years led to the end of the Bretton Woods fixed exchange rate regime and made it much easier for countries to manipulate their currencies’ relative values to maintain persistent trade surpluses; (v) numerous countries’ liberalization of capital flows; and (vi) the role the U.S. dollar plays as the global reserve currency and how U.S.-denominated assets work as safe investments for governments and private sector worldwide.

Why Global Trade Imbalances Are an Issue and Not Only for the United States

Most mainstream economists claim that countries with trade deficits are to blame for their situation by being populated by profligate spenders/undersavers, suggesting there is no role for governments or policy to change the situation. In fact, global chronic trade imbalances are more closely tied to other countries’ mercantilist policies, which prop up one country’s economy at the expense of others, usually by boosting domestic manufacturing at the expense of foreign manufacturing.⁴ Mercantilist policies, also called beggar-thy-neighbor, are aimed at artificially boosting a country’s exports in a sustained and destabilizing way. These include: (i) widespread industrial subsidies, which often lead to global overcapacity; (ii) exchange rate manipulation to maintain an undervalued currency; (iii) anti-labor policies to suppress wage growth; and (iv) repressed interest rates, which indirectly make households subsidize producers.

U.S. policymakers have enabled these strategies by privileging the U.S. financial sector and prioritizing the possibility of leveraging the dollar’s global reserve currency role to sanction countries, corporations and individuals. This bargain— what has been called the “exorbitant privilege” of the dollar, but that may better be dubbed the exorbitant burden for the average American—has led to the hollowing out of U.S. manufacturing, increasing public and private debt, rising economic inequality, loss of good-paying union jobs, and economic insecurity. (Recall that while monetary and fiscal policy largely determine the total number of jobs in the U.S. economy, trade shapes what types of jobs are available. When the United States loses millions of manufacturing jobs, the quality and wages of the jobs available to the 60-plus percent of American workers without college degrees declines. And, the displaced manufacturing workers are added to the labor pool of those competing for what often are lower-wage non-professional service sector jobs, which further reduces wages paid to such workers.)

While the United States has by far the largest chronic trade deficit, today 66 nations have global deficits while 19 nations systematically have chronic global surpluses not related to oil or gas exports (See full list in the Appendix.).⁵

Other countries that allow their currencies to adjust to macro imbalances and thus have persistent deficits or even those with balanced trade experience similar problems. For instance, most Latin American nations liberalized their economies during the 1980s, including by slashing tariffs and allowing their currencies to float, and experienced a deep deindustrialization process as a result. The outcome has been dependency on the export of raw materials, significant external debt, high levels of “informality” in the economy, and recurrent economic and social crises.

People in persistent surplus countries are not necessarily better off. Given that beggar-thy-neighbor policies subsidize production at the expense of consumption, households in these nations often experience suppressed wages, an undervalued currency, and/or persistent low interest rates on their savings.

Are “Reciprocal Tariffs” the Right Strategy to Deal with Global Trade Imbalances?

There are several policy solutions that could help reverse the U.S. chronic trade deficit and address the global imbalances that have characterized the world economy for decades. Tariffs are one of those tools. However, tariffs’ effectiveness depends on how they are deployed. The “reciprocal tariffs” framework is unlikely to deliver on these goals.

Using tariff threats to force countries to reduce their own tariffs or get rid of regulations is not the right approach. Even if the Trump administration exerted pressure on all of the countries that contribute the most to the trade deficit, it would be nearly impossible to achieve balance just by trying to force other countries to take more U.S. exports as we describe above.

Conversely, just imposing bilateral tariffs would be equally ineffective at rebalancing U.S. trade. Since President Trump imposed Section 301 tariffs on China in his first term (which were maintained and increased by the Biden administration), the U.S. trade deficit with China fell from $418 billion in 2018 to $295 billion in 2024.⁶ However, in the same period, the U.S. trade deficit with Mexico grew from $77.7 billion in 2018 to $171.8 billion in 2024,⁷ and the deficit with Vietnam grew from $39 billion in 2018 to $123 billion in 2024, fueling the growth in the U.S. deficit with the world.⁸

Chinese investment in these and other countries has created a workaround with Chinese firms able to reach U.S. markets and benefit from the trade terms these countries have with the United States.⁹

Perhaps more importantly, currency offsets affect the efficacy of tariffs as a balancing tool. There is a currency offset when other nations devalue their currencies to absorb the cost of a tariff and remain competitive. There is evidence this occurred when the Trump administration raised tariffs on Chinese goods in 2018 and 2019. China’s renminbi appreciation in response to the tariffs meant that the currency move offset more than three-fourths of the tariff applied by the first Trump administration.¹⁰

To put it briefly, trying to achieve balanced trade either by forcing more liberalization via tariff threats or by effectively hiking bilateral tariffs has not worked and is unlikely to achieve the desired objective of having balanced U.S. trade and a more just trading system. U.S. policymakers must be creative and consider the need for policy experimentation to deal with this global challenge.

What Would Be a Better Approach to Deal with Global Chronic Imbalances?

The best possible scenario would be the creation of a new system to replace the twisted and rusting remains of the Bretton Woods regime that deprioritizes the role of the dollar in the global economy, creates strict rules against currency manipulation to solve persistent trade imbalances, and provides preferential trade terms to countries willing to maintain balance and disavow mercantilist policies.

In the absence of a new multilateral monetary arrangement, U.S. regulators could intervene in the foreign exchange markets in a similar way that other countries do and accumulate foreign exchange reserves to drive down the value of the dollar.¹¹ A better alternative would be imposing capital controls on financial inflows in the United States and other countries running persistent trade deficits. Taxing or otherwise limiting the inflow of capital to the United States would restrict surplus countries’ ability to dump excess savings into the U.S. financial system, allowing the burden to fall on financial institutions rather than consumers. This move would not necessarily be unprecedented. Many countries have adopted capital controls, both on inflows and outflows, to address balance of payments issues. In 2019, Senators Tammy Baldwin (D-Wis.) and Josh Hawley (R-Mo.) proposed a bill that would impose a “market access charge” on transactions that involve the purchase of U.S. assets by non-U.S. persons. This charge, effectively a capital control on financial inflows, would have the objective of balancing the U.S. current account.¹² There could be other ways to adopt capital controls. Before being nominated as Chairman of the Council of Economic Advisers, economist Stephen Miran proposed the adoption of a user fee on foreign official holders of Treasury securities by withholding a portion of interest payments on those holdings.¹³

Tariffs can also play a role in addressing macro imbalances, but they must be strategically deployed. First, from a rebalancing perspective, there is no reason to apply tariffs on global deficit countries and those with balanced trade. These economies are also absorbing the global imbalances generated by mercantilist countries. Fortunately, most U.S. free trade agreement (FTA) partners—except for South Korea, Guatemala, Israel, and Singapore—are either deficit countries or maintain balanced trade. Thus, the United States could work with its FTA partner countries to put pressure on mercantilist countries. This would require excluding most FTA partners from tariffs and convincing them to raise their own tariff levels on mercantilist countries. This approach would both increase the effectiveness of the strategy and reduce the potential side effects of U.S. tariffs, namely, supply chain disruptions and potential retaliation. (The U.S. bilateral deficit with Mexico, which has a trade deficit with the world, can be addressed with renegotiation of the U.S.-Mexico-Canada Agreement, for which a mandatory six-year review starts soon.)

On the domestic front, tariffs could risk a wave of price gouging by corporations with market power that could use the import duties as an excuse to raise prices and bolster their profits. Similarly, corporations could take advantage of the tariff protection to increase prices and gain market share, and also NOT raise wages. Thus, the use of tariffs to address trade imbalances must be paired with complementary policies that ensure everyday Americans are benefited.

Effectively, such policies are needed to ensure that the corporations raking in record profits, in part because of the rigged trade system and record-low taxes, pay for the adjustment back to a more balanced regime—not workers and consumers. First, the government would need to strongly enforce competition policies and implement anti-price-gouging policies that punish firms that exploit the existence of tariffs to unduly raise consumer prices. (Notably, the last time a president imposed universal tariffs, downright price controls were also applied! The 1971 “Nixon Shock” involved 10% across-the-board tariffs, the end of dollar-gold conversion, and price controls on numerous categories of goods.) Second, the government must facilitate workers gaining better wages, by facilitating easier unionization and collective bargaining processes via enactment of the PRO Act and similar policies.

Balancing Trade Alone Will Not Deliver a Just International Economic Order

While balanced trade might reduce some of the existing incentives to compete in the international economy by lowering standards, such as suppressing labor rights, it will not be enough to guarantee that international exchanges respect a minimum floor of decency. Therefore, for a new global trade system to deliver broad benefits, it must provide for market access among countries that are willing to adhere to the international norms and values established in agreements such as the ILO fundamental conventions and the Multilateral Environmental Agreements.

The outcome would be a two-tier global trading system with more favorable terms among nations agreeing not to employ various mercantilist tools, committing to maintain balanced trade, and adopting mechanisms to correct imbalances, such as temporary tariffs, capital controls, and/or currency value corrections. The provision of such favorable terms would be conditioned on meeting core labor and other standards that can establish a more level playing field for global trade designed to benefit working people, small businesses, and farmers and their communities, not only the largest multinational corporations. Whether the Trump administration and its April 2 policies move in this direction remains to be seen.

Appendix. List of Chronic Deficit and Surplus Countries*