To significantly reduce or eliminate the U.S. trade deficit, the dollar would likely need to weaken considerably. The magnitude of this decline remains uncertain, as historical instances of large dollar depreciation are infrequent and their impacts on trade are unpredictable.
President Trump’s economic agenda focuses on reducing the trade deficit, which he views as a result of other countries unfairly benefiting at America’s expense. Stephen Miran, chair of the Council of Economic Advisers, recently published a paper asserting the dollar is “persistently over-valued” from a trade standpoint.
To shift this, he argues for increased tariffs and a departure from the strong dollar policy, which could drastically alter global trade and financial systems. The greenback has already declined nearly 10% this year amid rising concerns regarding U.S. fiscal policy and the country’s diminished “safe haven” status.
However, it is worth noting that a previous 15% drop in the dollar during Trump’s first term failed to impact the trade deficit, which remained steady until the pandemic. The challenge of eliminating the trade deficit without triggering a recession is significant.
The U.S. has operated with a trade deficit for nearly 50 years due to high consumer demand and overseas investment in U.S. assets. There have been few instances of short-lived trade surpluses, mostly aligning with U.S. economic slowdowns that ultimately led to recessions.
While some economists propose that a 20-30% decline in the dollar could significantly reduce the deficit, historical trends indicate such a depreciation could be complex. Past large declines in the dollar do not consistently correlate with reductions in the trade deficit.
The administration may face considerable obstacles in achieving its goals without economic repercussions.