The indirect impact of Trump’s tariff war

[MILAN] An overwhelming majority of economists are convinced that, contrary to what US President Donald Trump apparently believes, tariffs cannot mitigate a current-account deficit. But there is little recent evidence for this position, for the simple reason that tariffs have been running at very low levels globally, with most developed economies maintaining average tariff rates in the low single digits. So, what explains the consensus?

For starters, high tariffs did prevail during the interwar period, in the 1920s and 1930s, and there was no evidence that tariffs improved a country’s current account. The US was running a trade surplus when president Herbert Hoover enacted the infamous Smoot-Hawley Tariff Act of 1930. While global trade subsequently plummeted, America’s trade balance did not improve.

But even without first-hand evidence of the impact of high tariffs on current-account balances, economists can reach credible conclusions, because we know what determines those balances: the difference between an economy’s aggregate savings and investment. In the US, the national savings rate amounts to 17 per cent of gross domestic product. In the European Union, that rate is about seven percentage points higher, at 24 per cent of GDP. Since these two continent-sized developed economies share very similar investment rates, the difference in savings is reflected almost directly in the current-account balance, with the US posting a deficit of nearly 4 per cent of GDP in 2024, and the EU achieving a surplus of 2.7 per cent of GDP.