Goldman Sachs: Tariff policies will reduce the U.S. trade deficit, and overall trade volume may decline

According to the Zhitong Finance APP, the U.S. trade deficit has expanded from 2.8% of GDP in 2004 to 3.2% in 2024. Due to the U.S. economy performing better than its trading partners, U.S. interest rates continue to rise, and the dollar strengthens. Goldman Sachs released a research report stating that looking ahead, higher tariffs and their impact on the U.S. and global economy will play a key role in the U.S. trade outlook.

Stronger tariffs in the U.S. mean that the initial burden of increased tariffs is entirely borne by consumers, whose economic scale is smaller than the total of other global economies. Meanwhile, abroad, the increase in tariffs can be partially offset by exchange rate fluctuations. Due to dollar pricing and depreciation, trade balance has improved, but the net impact is minimal.

Higher tariffs affect U.S. imports and exports in three key ways. First, tariffs directly reduce U.S. imports from other countries because tariffs increase import costs. Goldman Sachs stated that if other countries retaliate with tariffs as expected, tariffs will also pressure U.S. exports. Economic research from the last trade war indicates that for every 1 percentage point increase in effective tariff rates, imports are directly reduced, and the trade deficit as a percentage of GDP shrinks by about 0.3 percentage points, while comprehensive retaliatory tariffs will offset about 0.2 percentage points of that impact.

Second, tariffs increase the value of the dollar, making U.S. exports more expensive and imports cheaper, thereby widening the trade deficit. Based on event studies before and after the 2018-2019 trade war, Goldman Sachs confirmed that the dollar appreciated significantly due to tariff announcements. Goldman Sachs estimates that about one-third of the dollar's movements may reflect a "safe-haven" effect amid rising economic uncertainty, which the investment bank expects is now less relevant. That said, event study analyses often produce a wider range of foreign exchange forecasts than other methods, and changes in target countries and product combinations, as well as policy responses to tariffs, may make this dollar appreciation appear different this time.

Third, tariffs slow foreign economic growth, thereby weakening demand for U.S. exports, lowering foreign interest rates, and further pushing up the dollar's value against foreign currencies. To measure the combined impact of these dynamics, Goldman Sachs uses its version of SlGMA (an international economic model developed by the Federal Reserve) to simulate tariff policies. The model indicates that without foreign retaliation, increasing tariffs in the U.S. will lead to dollar appreciation and temporarily improve the U.S. trade balance, while retaliatory tariffs will moderate the impact.

Combining Goldman Sachs' analysis with tariff benchmarks and its economic forecasts for the United States and its trading partners, the investment bank expects the U.S. trade deficit to narrow slightly over the next year, decreasing from 3.2% of GDP in Q4 2024 to around 3.0% in Q4 2025. Even though the impact of tariffs on trade balance is limited, Goldman Sachs expects that they will undoubtedly reduce overall trade volume, with the bank forecasting that the share of U.S. exports and imports in GDP will decline by about 1 percentage point each, as higher tariffs put pressure on international trade