Number Theory: Why “liberating” US will take more than tariffs

Trump is claiming that the move, its global disruption notwithstanding, will revive the fortunes of the American economy and its working people

US President Donald Trump is set to announce reciprocal tariffs today (April 2). The move is expected to unleash large scale chaos in the global economy, and, if countries decide to retaliate, possibly trigger a massive trade war. Trump is claiming that the move, its global disruption notwithstanding, will revive the fortunes of the American economy and its working people. But data suggests tariffs alone cannot solve the problems of American economy, and more importantly, its working people.

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  US trade deficit improved and stabilized before Trump’s first election victory

  In 2024, US had a combined trade deficit (goods and services) of 3.1%. This number used to be much higher a couple of decades ago after having increased continuously for almost three decades beginning the mid-1970s. The moderation in US trade deficit happened before Trump came to power for the first time in 2016, which suggests that the reasons are likely to be more economic than political. Things such as US becoming an energy exporter instead of importer thanks to the fracking boom etc. could have played a role . Can tariffs help the US eliminate its remaining trade deficit as well? Any such claim must confront the fact that US is among the most high-wage countries in the world which means that domestically produced goods will likely be significantly more expensive than imported ones. See Chart 1: US net exports of goods and services as a share of GDP
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  US’ domestic economy has been pivoting towards knowledge-intensive production for a long time

  Long-term data on composition-wise share of private investment in US GDP shows that the share of equipment (machinery) and structure has been almost unchanged over several decades. The share of investment in intellectual property products (IPP), however, has been rising continuously in the US, especially since the 1970s, so much so, that it became the largest component of private investment in the current decade. See Chart 2: component-wise private investment as share of US GDP
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  Increasing knowledge intensity has made US companies more valuable

  Data form the World Bank shows that the market capitalisation of listed domestic US companies as a share of GDP, increased at a sharp pace between 1970s and 1999 (which is when the dotcom bubble burst). This number has been much more volatile since and reached new peaks in the recent period. Just the biggest tech companies in the US – Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA and Tesla – have a market cap of more than half of US GDP (to be sure, this is only for reference as one measure is stock and the other, flow, and the two cannot be compared). Debates over current overvaluation of these companies notwithstanding, the rising value of these companies vis-à-vis the US economy shows the rising skill premium, which is also reflected in the education premium in the US labour (https://tinyurl.com/dj7hexvv). See Chart 3: Market-cap of domestic companies to GDP ratio in US
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  All this has led to two different Americas for the rich and poor

  Trump’s trade wars and other economic disruptions are likely to take a toll on US, even global growth. What explains his obsession with such disruptive policies given the economic costs and its potential political blowback ? While politics need not always align with economics, one of the factors emboldening Trump could be that fruits of growth have been shared in a very unequal way in post-Reagan US. World Bank data shows that while US GDP growth slowed considerably after Ronald Regan’s neoliberal revolution, the rich actually experienced a faster growth in increased GDP which accrued to them and almost all of the squeeze was on income of the poor. As the rich criticize and worry about Trump destroying an economic order which has served them well, the poor, given their own experience could well be buying into Trump’s cynical rhetoric. To be sure, any improvements in fortunes of the poor will require a nuanced engagement with the systemic factors (described above) behind rising inequality in the US. Trump’s political genius, of course, lies in the fact that he has managed to recruit both the super-rich (Musk et al) and poor (MAGA) in his camp for now. His opponents might be guilty of being on the other extreme. They cannot see the reality that the existing economic order massively short-changed America’s non-rich. See Chart 4: GDP growth for different income segments

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