By Wang Yong

The series of tariff measures announced by the US on April 2 continue to stir economic turbulence. US President Donald Trump hailed this day as "Liberation Day." However, with the rollout of tariffs exceeding expectations, international opinions have branded it as "Isolation Day," "Inflation Day," or "Recession Day." Washington hopes to rebalance trade and bolster American manufacturing through "reciprocal tariffs." Yet, as some economists point out, tariffs are unlikely to restructure the US economy in the way that the Trump administration intends. A most probable outcome of tariffs is isolationism, synonymous with higher inflation and lower economic growth.

In 2024, the US trade deficit reached $918.4 billion. One might wonder why, in a global trade environment with similar challenges and opportunities, the US runs a trade deficit significantly larger than many other economies. The answer lies in the unique structural characteristics of the American economy. Characterized by a low savings rate and high consumption levels, where savings consistently fall short of investment needs, the US has found itself relying heavily on imports to bridge this gap. This pattern of high consumption, including a significant demand for imported consumer goods and resources, underpins the persistent trade deficit, highlighting deep-seated, structural economic challenges.

The Trump administration's strategy of implementing "reciprocal tariffs," though seemingly tough, is fundamentally misguided and unlikely to yield the desired outcomes. By imposing tariffs and restricting imports, this approach fails to address the core structural challenges faced by the US economy. Instead, it risks exacerbating inflationary pressures by increasing the cost of imports, which can reduce real income for consumers and undermine the household sector's ability to save, thereby perpetuating a detrimental cycle.

Blaming trade deficits on economic policies, tariffs and non-tariff barriers of other countries essentially represents an ostrich-like approach, one that sidesteps the fundamental structural issues within the US economy.

Over the past few decades, the US has emerged as one of its primary beneficiaries of globalization. On the one hand, international trade has provided US consumers with a wide range of affordable products, meeting their increasing consumption needs and improving their quality of life. On the other hand, the deepened international division of labor within global supply chains has allowed US companies to lower production costs by investing regions with cheaper labor, utilizing local resources to achieve substantial gains in international investment and trade.

This paradigm has anchored consumer prosperity in the US for decades, underpinned by high debt levels and the dollar's dominance, core components of the country's current economic expansion.

Initially, the US was a major proponent of economic globalization. Now, if the US attempts to dismantle this framework, the economic prosperity built on this economic paradigm over the past decades may also face the threat of collapse.

Undoubtedly, the current US economic model confronts structural challenges requiring nuanced examination. Its embrace of debt-fueled consumerism now manifests as systemic vulnerability in household balance sheets. Moreover, the overemphasis on shifting from manufacturing primacy to service-dominated growth and the severe hollowing out of the manufacturing sector is a source of growing concern.

In order to solve these challenges, it requires the US to seek forward-thinking solutions rather than a return to nostalgic protectionism. The trajectory of globalization, having evolved through successive technological revolutions and institutional developments, resists any regression to earlier mercantilist models. Erecting high tariff barriers and isolating itself behind self-imposed restrictions will only lead to economic decline. In the rapidly evolving landscape of the 21st century, within an open global economy, can the US truly return to a self-sufficient "old era?" It's clear that Washington has prescribed the wrong "remedy" for its economy.

To effectively address trade imbalances, the US needs to confront the underlying challenges within its economic framework. This entails reforming US domestic tax policies, enhancing the purchasing power of the middle class through wealth redistribution to foster consumption that is not reliant on debts, upgrading infrastructure, developing a workforce of skilled technicians, reducing manufacturing costs and curbing financial speculation to direct capital toward productive economic activities.

However, these necessary reforms could run up against entrenched issues in the US political landscape. Presently, the political discourse in the US is dominated by the misleading narrative of "China stealing jobs," which overlooks the structural problems plaguing the US economy. The continued politicization of tariffs, rather than advocating for meaningful economic reforms to strengthen the foundations of US economic growth, suggests that the recent push toward "reindustrialization" may ultimately be illusory.

The author is a professor at the School of International Studies and director of the Center for American Studies at Peking University.

The article first appeared in the Global Times:

https://www.globaltimes.cn/page/202504/1331780.shtml