Goldman Sachs: Tariff policies will reduce the US trade deficit and overall trade volume may decrease.

The trade deficit of the United States increased from 2.8% of GDP in 2004 to 3.2% in 2024. Due to the better performance of the U.S. economy compared to its trading partners, U.S. interest rates have been rising steadily and the U.S. dollar has strengthened. Goldman Sachs has released a research report stating that higher tariffs and their impact on the U.S. and global economy will play a key role in the outlook for U.S. trade. Higher tariffs in the U.S., initially fully borne by consumers, have a smaller net impact due to the country's economy being smaller than the combined total of other world economies. Abroad, tariff increases can be partially offset by exchange rate fluctuations. Trade balance has slightly improved due to the depreciation of the U.S. dollar, but the net effect 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 they increase the cost of imports. Goldman Sachs states that if other countries retaliate by imposing tariffs, it will also put pressure on U.S. exports. Economic research from the last trade war suggests that for each 1% increase in effective tariff rates, imports directly decrease and the percentage of trade deficit to GDP shrinks by about 0.3%, with comprehensive retaliatory tariffs negating around 0.2% of this impact. Secondly, tariffs increase the value of the U.S. dollar, making U.S. exports more expensive and imports cheaper, thus widening the trade deficit. Goldman Sachs confirms that the U.S. dollar significantly appreciated due to tariff announcements during the 2018-2019 trade war. The bank estimates that about one-third of the dollar's movement may reflect a "safe-haven" effect during times of rising economic uncertainty, which they believe is less relevant now. However, event studies analysis often produces wider ranges of foreign exchange forecasts than other methods, and changes in target countries and product combinations as well as policy reactions to tariffs may have resulted in a different outcome in this case. Thirdly, tariffs slow down foreign economic growth, weakening demand for U.S. exports, lowering foreign interest rates, and further increasing the value of the U.S. dollar against foreign currencies. To measure the comprehensive impact of these dynamics, Goldman Sachs used its version of SlGMA (an international economic model developed by the Federal Reserve) to simulate tariff policies. The model indicates that, in the absence of foreign retaliation, U.S. tariffs would lead to a stronger dollar, temporarily improving U.S. trade balance, while retaliatory tariffs would have a milder impact. Combining Goldman Sachs' analysis with tariff benchmarks and their economic forecasts for the U.S. and its trading partners, the bank predicts a slight narrowing of the U.S. trade deficit in the coming year, from 3.2% of GDP in the fourth quarter of 2024 to around 3.0% in the fourth quarter of 2025. Even though the impact of tariffs on trade balance is limited, Goldman Sachs expects them to undoubtedly decrease overall trade volume, with U.S. exports and imports as a percentage of GDP predicted to decrease by around 1% each due to the pressure brought on international trade by higher tariffs.