There are many reasons President Trump should not be pushing Congress to pass huge tax cuts, but here’s one you may not have heard: Budget deficits and trade deficits are twins. When the former go up, so, generally, do the latter. So at the same moment Mr. Trump is upending the global economy in a feckless attempt to eliminate America’s trade deficit, he’s essentially pressuring Congress to increase it.
Here’s how it happens. The United States buys a lot of goods from other countries, and we pay for the goods with dollars. But those dollars are no good abroad, so the countries we buy from invest them here. Some of the money goes, directly or indirectly, into businesses that are raising cash to build new data centers or expand natural gas facilities or construct new apartment complexes. Other dollars go into Treasury bonds or bills, which the federal government uses to fund our large budget deficit. (The same thing happens in reverse when other countries buy from the United States — but to a lesser degree, since our imports are larger than our exports.)
If the budget deficit rises, American investors could theoretically cover the shortfall, but that would mean putting their money in Treasury securities rather than businesses and their capital needs. The other option is that foreign countries amass more dollars and plow them back into the U.S. economy. How would they get those additional dollars? From all the German cars and Chinese electronics and imported beer that Americans will buy with the money from their tax cuts.
More generally, a larger budget deficit will require the government to borrow more money, which drives up interest rates. Higher interest rates mean a stronger dollar, which makes it more expensive for people in other countries to buy our products, cheaper for us to buy theirs, and thus the trade deficit widens.
So cutting taxes, as Mr. Trump has told Congress to do, will drive up the budget deficit — and the trade deficit. All of this may seem counterintuitive, but it’s one of the few things that economists agree about.
The budget deficit is already worryingly high and the tax cuts Mr. Trump is seeking would make it even larger. Last year the United States ran a $1.8 trillion budget deficit, or 6 percent of the gross domestic product — higher than at any other time except during World War II, the late-2000s financial crisis and the Covid-19 pandemic — despite strong economic growth and no unusual emergencies.
The Congressional Budget Office projects that the budget deficit will continue to average 6 percent of G.D.P. over the next decade, which would result in a relentless increase in debt as a share of the economy. The budget instructions that Congress just passed, authorizing giant tax cuts and some modest spending increases, would add another $7 trillion to the debt through 2034, according to the Committee for a Responsible Federal Budget. That would take the budget deficit to an estimated 8 percent of G.D.P. or more.
Despite DOGE’s grandiose claims, noninterest spending since Mr. Trump’s inauguration is an estimated 9 percent higher than for the same period last year. Meanwhile, the I.R.S. work force is being significantly reduced, which will make it harder to collect taxes. And no, the revenue from tariffs won’t make up the difference. Nor would the spending cuts in the budget Mr. Trump just proposed for next year.
Adding 2 percent of G.D.P. to the budget deficit would add a substantial amount to its twin, the trade deficit (broadly defined, or what economists call the “current account deficit”), taking it toward 6 percent of G.D.P. from 4 percent, with the exact increase depending on a number of other moving pieces in the economy.
There is nothing wrong with a trade deficit per se. Imports are good and something we value. And there is definitely nothing wrong with bilateral trade deficits. It makes sense that the United States runs a trade deficit with Lesotho, which sells us diamonds but does not buy much of our exports, while running a trade surplus with Brazil, which needs our energy resources to fuel its economy.
But it is possible to have too much of a good thing. A large trade deficit requires attracting a continued inflow of foreign investment into the United States and borrowing by the country, all of which can make our economy more vulnerable to global shifts, while repaying the foreign lenders can reduce future living standards. A rule of thumb I use is that a trade deficit in the range of 3 percent to 6 percent of G.D.P. needs a good explanation, and when the trade deficit rises above 6 percent of G.D.P. it is almost always a real problem. More tax cuts would push us even closer to that real problem.
America’s trade deficit was made here in America in tandem with its greedy twin, the budget deficit, which requires large inflows of foreign funding. The twin problems can both be addressed by living more within our means, something the federal government is utterly failing to do. At a minimum, Congress could set the more modest goal of not making the problem any worse by adding to the already unsustainable debt trajectory.
Jason Furman, a contributing Opinion writer, is a professor of the practice of economic policy at Harvard University and was chairman of the White House Council of Economic Advisers from 2013 to 2017.
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