One of President Donald Trump’s first actions after assuming office again was to release a memorandum on an “America First Trade Policy.” Section 2(a) of the memorandum calls for the Secretary of Commerce, in consultation with the Secretary of the Treasury and the United States Trade Representative, to undertake the following actions:
Investigate the root causes of persistent goods trade deficits.
Assess their economic and security implications.
Recommend “corrective actions,” such as supplemental tariffs or other policies.
On February 13, 2025, President Trump signed a memorandum to develop a “reciprocal” tariff system, aiming to match the duties other nations impose on U.S. goods. This move is part of the administration’s broader strategy to address perceived unfair trade practices and reduce the trade deficit. It describes trade deficits as a threat to our national security.
These concerns are not new. In response to growing political debate over trade deficits in the 1990s, Congress established the U.S. Trade Deficit Review Commission (TDRC). The bipartisan Commission was tasked “to study the nature, causes, and consequences of the United States merchandise trade and current account deficits.” Its 2000 report, The U.S. Trade Deficit: Causes, Consequences, and Recommendations for Action, remains relevant to President Trump’s request. Given Republican control of the presidency and both Houses of Congress, the responses from Republican TDRC commissioners are particularly pertinent to each of the areas mentioned in Trump’s memorandum.
1. Investigate the root causes of persistent trade deficits.
The commissioners concluded that trade barriers are not the primary cause of trade deficits. Instead, the relative strength of the U.S. economy, particularly during global economic slowdowns, drives trade imbalances. Specifically, they emphasized, “The growth of the U.S. trade and current account deficits primarily stems from the relative strength of the U.S. economy, particularly during a time when the performance of other national economies lagged.”
The commissioners attributed persistent trade deficits to the strong U.S. economy and domestic macroeconomic factors. International capital flows result from the economy’s relative strength, as higher investment returns attract foreign capital.
As Nobel laureate Milton Friedman testified before the TDRC: “The remarkable performance of the United States economy in the past few years would have been impossible without the inflow of foreign capital, which is a mirror image of large balance of payments deficits.”
2. Assess the economic and security implications of trade deficits.
On trade deficit implications, the TDRC emphasized the benefits of open trade. Witnesses testified that economies open to trade grow faster than closed ones. A study by Jeffrey Sachs and Andrew Warner found that, from 1970 to 1990, open economies grew at 2.25% annually, whereas closed economies grew at less than 1%.
The commissioners noted the relationship between U.S. national security and trade policy. They cautioned against protectionism, citing Friedman’s testimony that the best way to open other markets is for us to set a good example.
The commissioners concluded: “International trade has enhanced our standard of living.
Any policy response to trade and current account deficits should not undermine those benefits, just as it must also recognize that these deficits are largely the outcomes of our strong economic growth.”
3. Recommend “corrective actions,” such as supplemental tariffs or other policies.
Regarding corrective actions, the Commission advised that reducing trade deficits should not be a government policy goal. Instead, the focus should be on ensuring a rising standard of living for Americans. Trade and current account deficits result from economic performance, not deliberate policy targets. Addressing them through policy intervention such as tariffs would come at the cost of lost output and higher unemployment.
Economic consensus supports this view. A 2020 survey of American Economic Association members found that 65.2% disagreed with the notion that a large balance of trade deficit has an adverse effect on the economy.
The America First Trade Agenda memo is expected to culminate in a report by April. Based on the TDRC’s findings:
Trade deficits stem from strong U.S. investment appeal, not foreign trade barriers.
Trade deficits do not inherently threaten economic security; they primarily reflect domestic economic factors.
Rather than correcting trade deficits, policy should focus on tax and regulatory reforms to strengthen the economy.
As the administration moves forward with its trade agenda, policymakers should heed the lessons from past reviews of trade deficits. The TDRC’s findings highlight that trade imbalances are primarily a reflection of domestic economic conditions rather than unfair foreign practices. Efforts to “correct” these deficits through tariffs risk undermining economic growth and job creation. Instead, policies that foster a competitive business environment—such as tax and regulatory reforms—offer a more effective path to strengthening the U.S. economy while maintaining the benefits of open trade.