“The U.S. runs large fiscal deficits and high debt, about 30% of which is held by foreign investors, Fed data show. An economic rule in play here? The current account deficit cannot be reduced without a corresponding fall in foreign financing. By pushing to reduce the trade deficit quickly, the U.S. will find it harder to finance its debt, especially if unpredictable tariff negotiations dent the confidence of foreign investors. That points to higher bond yields and debt servicing costs, upending budgetary arithmetic. Another rule? Global supply chains can evolve over time but cannot be rewired at speed without major disruption. Tariffs not only raise costs but can cut access to key inputs and potentially halt production. That risks a growth slowdown or recession with high inflation, just like in the pandemic. That limits any central bank response. In seeking to slash trade deficits fast, the U.S. will bump up against these economic rules. That seems to have already happened with the recent rapid Treasury selloff and tariff exemptions for electronics to avoid the most obvious supply chain disruptions. We see U.S. policy shifts adding to the structural transformation already underway. That transformation could have any number of outcomes in coming years.”
Morten W. Langer
