Understanding Tariffs: Trade Surplus, Deficits, and Why They Matter

There has been considerable discussion recently about tariffs and trade deficits, with a wide range of opinions circulating on the topic. Some experts often argue that tariffs are detrimental to the economy, while President Trump regards them as a powerful tool. But what is the truth behind tariffs and their impact on trade?

I will guide you through the fundamental concepts of tariffs, trade deficits, and trade surpluses in a clear and accessible manner. My understanding of tariffs stems from my time as the Global Chief Digital Officer at LafargeHolcim, the world’s largest building materials manufacturer, where I dealt with various forms of tariffs across different regions, including on imported cement in the United States.

Currently, I lead a dental management organization as its CEO that acquires, invests in, and operates dental and implant surgery centers in the New York metropolitan area. I will use a straightforward example from this industry to further illustrate these concepts.

Imagine you’re a dentist running a successful practice. I’m a dental equipment supplier. We meet at a business networking event and decide to help each other out. You agree to buy dental supplies from me, and in return, I’ll refer patients who need dental work. Sounds like a good deal, right? But let’s say after a few months, I’ve referred five patients to your practice, and you’ve only bought one small piece of equipment from me. Now, I’m starting to notice a problem—I’ve got a “referral deficit,” while you’ve got a “referral surplus.” This imbalance is similar to what happens with trade deficits and surpluses between countries. When one country imports more than it exports, it ends up in a trade deficit, while the other country enjoys a trade surplus.

Now, fast forward a couple of years. I’ve referred hundreds more patients to your practice than you’ve bought from me in equipment. At some point, I’d start to feel frustrated. Why am I sending you all this business while I’m hardly seeing any return on my end? This is the situation the U.S. finds itself in with countries like China. Right now, the U.S. has a global trade deficit of $1.1 trillion. That means we’ve spent $1.1 trillion more buying foreign goods than other countries have spent buying our goods. And China is the biggest player in this imbalance, with an $823 billion trade surplus over the U.S.

So, what does that really mean? It means that China is selling a lot more products to the U.S. than they are buying from us. It’s as if they’re getting all the referrals, and we’re barely getting any in return. This is where tariffs come into the conversation. A tariff is basically a tax on imported goods. The goal is to make foreign goods more expensive so that consumers are more likely to buy products made at home, boosting local industries.

But tariffs aren’t a new concept. They’ve been used for centuries—going all the way back to the Roman Empire. They became a key part of economic strategy during the era of mercantilism in the 16th and 18th centuries when European nations like Britain and France imposed tariffs to protect their domestic economies and build up wealth. The idea was simple: if you’re not buying from us, we’ll tax your goods so heavily that you’ll be forced to buy locally. And while that might seem like a clever idea, it’s not without its drawbacks.

Adam Smith, the famous economist who laid the foundations of modern capitalism, was a vocal critic of tariffs. He believed in free trade—the idea that countries should compete without barriers because it would lead to lower prices and better-quality goods for everyone. In his view, tariffs artificially inflate prices and shield industries that wouldn’t survive in a competitive global market.

However, even Smith admitted there were cases where tariffs made sense. He pointed out two specific situations where they could be useful: first, to protect industries vital to national security, and second, as a response to tariffs imposed by other countries. This is precisely where the U.S.-China trade relationship becomes significant.

China has been playing the trade game for years, strategically growing its economy by selling far more to the U.S. than it buys from us. This has led to an enormous trade imbalance, which has been hurting American industries for decades. Let’s take the steel industry, for example. In the 1950s, more than 700,000 Americans worked in steel production. Today, that number has plummeted to just 140,000. Why? Because much of the steel manufacturing has been outsourced to China, where it’s cheaper to produce. Now, nine out of the world’s top 15 steel producers are based in China. The U.S., once a leader in steel production, has fallen way down the list.

And it’s not just steel. This imbalance affects a wide range of industries, costing the U.S. countless jobs. Recognizing this issue, the Trump administration made tariffs a cornerstone of its trade strategy, especially with China. By imposing tariffs on Chinese goods, Trump aimed to pressure China into renegotiating trade deals and leveling the playing field. And it wasn’t just China. Trump used tariffs as a tool in renegotiating trade agreements with Mexico, Canada, South Korea, and several other countries to get better terms for the U.S.

So, do tariffs actually work? In some cases, yes. They can protect domestic industries by making foreign products more expensive, which encourages consumers to buy American-made goods. This, in turn, can create jobs and stimulate local economies. But there’s also a downside. Tariffs can raise prices for everyday products, making them more expensive for consumers. Plus, they can trigger trade wars—where one country imposes tariffs, and the other country retaliates by doing the same. This tit-for-tat can disrupt global trade and hurt businesses that rely on importing goods.

It’s a delicate balancing act. Tariffs are a powerful tool, but they need to be used carefully. They’re not a fix-all solution. They must be part of a larger strategy that includes renegotiating trade deals and encouraging domestic production. Trump understood this and used tariffs as leverage to bring jobs and industries back to the U.S. Whether this strategy will have long-term success is yet to be seen, but it was clear that action was needed to address the growing trade imbalance.

One of the biggest issues in the U.S.-China trade relationship is intellectual property theft. For years, China has been accused of stealing American innovations—everything from software to manufacturing processes. The tariffs imposed by Trump were part of a broader effort to curb these unfair practices and force China to respect intellectual property rights. But it’s not just China that has benefited from trade imbalances. Look at countries like Germany, Japan, and South Korea. All of them have significant trade surpluses with the U.S., meaning they sell more to us than they buy from us.

This matters because trade deficits don’t just affect large corporations—they impact everyday Americans. When industries shut down because they can’t compete with cheaper foreign goods, jobs are lost. Families and entire communities are devastated. Look at what happened to the American steel industry. The U.S. once dominated global steel production, but today, it’s barely hanging on. Cities like Pittsburgh, once booming steel towns, have struggled to recover from the loss of these jobs.

So, what’s the answer? Renegotiating trade deals is one step in the right direction. Trump made headway on this front, but there’s still a lot more work to be done. The ultimate goal is to create fair trade agreements that protect American jobs while still allowing for healthy competition. Tariffs can be a part of this strategy, but they’re not the only solution.

It’s also important to recognize that tariffs can’t fix everything. In some cases, they might lead to higher prices for consumers, and they can strain relationships with our trading partners. That’s why it’s critical to strike the right balance. We need to protect our industries, but we also need to be mindful of the broader economic impact.

At the end of the day, tariffs are about leverage. They give the U.S. a bargaining chip in trade negotiations, enabling us to push for better deals. But like any tool, they must be used wisely. The real question is whether the U.S. is willing to stand up to countries like China and demand fair trade. If we don’t, we risk continuing to lose jobs and industries while other nations profit from the imbalance.

The next time someone brings up tariffs, trade deficits, or surpluses, remember this: it’s not just about numbers on a spreadsheet. It’s about the future of American jobs, industries, and the overall economy. Tariffs are just one piece of the puzzle, but they play a crucial role in shaping the country’s economic future. As global trade evolves, the U.S. must adapt to stay competitive while protecting its own interests. Whether tariffs will continue to be a significant part of that strategy remains to be seen, but one thing is for sure—the debate isn’t going away anytime soon.