Trump Tariffs Achieve What Economists Said Was Impossible
The Wall Street Journal’s headline on Thursday’s trade data declared that “America Imported a Record Amount Last Year Despite Seismic Trade Policy Changes,” emphasizing that the annual deficit “was little changed” and concluding that the tariffs “did little to dissuade Americans from importing.” Bloomberg declared: “US Notches One of Its Biggest Annual Trade Gaps Since 1960.”
Sounds scary enough to make some doubt that President Trump’s tariffs were having any effect at all. Maybe all those anti-tariff pundits were right and tariffs could not rebalance trade. That, of course, is precisely the reaction the stories were intended to provoke. All that sturm-und-drang over a slight decline in the trade deficit.
Fortunately, this framing obscures what may be the most dramatic trade rebalancing in modern American history.
Donald Trump dances during a rally in Doral, Florida, on July 9, 2024. (GIORGIO VIERA/AFP via Getty Images)
The Real Story Is in the Trend
While the annual 2025 deficit was essentially flat at $901.5 billion (down just $2.1 billion from 2024), this masks a seismic shift in the second half of the year—and particularly in the fourth quarter.
November 2025 posted the largest rolling three-month trade deficit decline in recorded history, with the three-month average falling $35.3 billion year-over-year, a 45 percent drop. This surpasses even the peak months of the 2009 Great Recession.
Three consecutive months in late 2025—October, November, and December—each posted year-over-year rolling-three month declines that rank among the top eight largest in recorded history in monthly data beginning in 1992. The only comparable period is 2009—but there’s a critical difference. The 2009 improvements came from economic collapse and demand destruction wrought by the financial crisis and recession. The 2025 improvements are happening during unusually high GDP growth.
The three-month average goods deficit in the fourth quarter of 2025 was $80.5 billion, down 27 percent from $109.6 billion in the fourth quarter of 2024—a decline of $29.1 billion. The combined goods and services deficit fell even more dramatically, dropping 40 percent from $83.6 billion to $50.7 billion.
Over the six months from July through December, the average goods deficit ran about $84.6 billion per month, roughly 20 percent below the year-earlier period. From the March peak—when importers were front-loading ahead of tariffs—to December, the combined trade deficit fell 48 percent, from $136 billion to $70.3 billion.
The Front-Loading Factor
To the Journal‘s credit, they note the timing issue: “The trade deficit soared in the months following Trump’s re-election in late 2024, as companies raced to bring foreign goods onshore ahead of the tariffs they expected him to impose.”
This is important context. The outsized deficits in the first quarter of 2025—averaging $154.8 billion per month—were artificially inflated by front-running. The subsequent decline partly represents a normalization after that surge. We’re essentially watching the payback period.
But even accounting for this, the improvement is striking. The question is whether the current run rate represents a sustainable new equilibrium or if deficits will creep back up once the inventory correction is complete. The next several months of data will be crucial.
Since 1992, there have been only two periods of comparable trade deficit declines. The first was the 2009 Great Recession, when seven of the top ten quarterly declines occurred between March and November, driven by economic collapse. The second is the final three months of 2025, with three of the top eight rolling three-month declines, driven by tariff policy during economic expansion.
This makes the fourth quarter of 2025 the largest trade deficit improvement in history outside of a major recession.
The Year of the Wooden Snake: Shedding the China Deficit
The country-level data tells an important structural story the annual aggregates conceal. Last year was the Year of the Wooden Snake for China, supposedly a year of transformation and wisdom revealed over time. In the final quarter of the year, the China deficit fell $93.4 billion to $202.1 billion—the smallest in more than two decades. That’s a 32 percent decline year-over-year, achieved not through recession but through deliberate policy rebalancing.
Trade flows shifted to Taiwan (deficit up $73 billion), Vietnam (up $54.7 billion), and Mexico (up to a record $196.9 billion). Some of this represents supply chain rerouting rather than true rebalancing. But the China numbers show tariffs can reshape bilateral trade patterns dramatically.
The legacy financial press’ focus on the flat annual deficit reflects a common analytical error: treating January through December as equally weighted when assessing policy impact. But Liberation Day tariffs were announced in April. The relevant comparison isn’t 2025 versus 2024—it’s post-tariff months versus pre-tariff months.
The critical question is sustainability. Several factors cloud the outlook. First, there’s the front-loading payback: how much of the second half of the year’s improvement simply reversed the tariff front-running surge? Second, weak foreign demand hurt exports in the fourth quarter, so a rebound in economic growth abroad could help. Third, as companies finish rerouting their supply chains, will the deficit stabilize or continue falling? Finally, the Supreme Court could upend the progress on trade balance if it decides to throw out the Trump tariffs.
The next six months of data will reveal whether we’re seeing a permanent structural shift or a temporary correction. But dismissing the historic fourth quarter improvement as “little changed” misses the forest for the trees.
America just experienced the largest quarterly trade deficit decline in recorded history outside of a recession. Three consecutive months in late 2025 rank among the top ten improvements ever. The trend is unmistakable even if the annual number is noisy.
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