Trump’s trade ambitions risk higher costs and weaker markets

Trump’s economic agenda could backfire on investors and consumers

A lower trade deficit may bring jobs home—but at a steep financial cost

President Donald Trump’s dual economic goals—slashing the trade deficit and reviving U.S. manufacturing—could reshape America’s financial landscape. But economists and investors caution that the side effects may be painful: higher borrowing costs, weaker markets, and less foreign capital supporting the economy.

At the heart of the issue is the U.S. balance of payments, a system that must remain in equilibrium. For decades, America has imported far more than it exports, resulting in a persistent trade deficit. That gap has been funded by foreign capital inflows—foreigners buying U.S. stocks, bonds, and Treasury debt.

If the trade deficit narrows, as Trump intends, those inflows shrink. And that changes everything.

Tariffs as economic disruption

Trump’s tariff strategy aims to make imported goods less competitive and shift production back to the U.S. This could reduce the goods deficit—but with major consequences. As imports fall and exports don’t rise proportionally, the resulting lower capital inflows will force Americans to save more to finance investment at home.

More saving means less consumption, weakening economic growth. It also means that domestic capital will need to replace foreign buying of government debt—pushing interest rates higher to attract that capital.

In effect, tariffs become a form of hidden taxation. They raise prices on imported goods, reducing consumer choice and increasing overall costs. The current tariff hikes—some reaching nearly 50% on imports from countries like Bangladesh and Cambodia—will have a disproportionate impact on lower-income households that rely on affordable goods.
 

Rising interest rates and falling stock prices

A reduced trade deficit leads to diminished foreign demand for U.S. Treasurys. To maintain funding, bond yields must rise, which directly affects corporate borrowing costs and, by extension, equity markets. With more attractive bond yields, investors may shift away from stocks—leading to lower share prices.

Moreover, less foreign capital means fewer buyers for U.S. equities and less demand for the dollar, further tightening financial conditions.

Only a small fraction of foreign investment actually funds U.S. factory construction. Most of it flows into financial markets. So if the administration achieves its trade goals, the capital needed to sustain market growth and government borrowing could dry up.

Dollar weakness and productivity decline

Economic theory holds that when a country saves too little, its currency should weaken to attract foreign investment. Yet the U.S. dollar has long been viewed as a safe-haven asset. That reputation is now being tested.

Recent geopolitical tensions, financial sanctions, and Trump’s frequent attacks on Federal Reserve Chair Jerome Powell have shaken global confidence in the dollar and the Fed’s independence. If the U.S. is perceived as less stable or predictable, global reserve holders may diversify away from the greenback.

A weaker dollar may help exporters in theory, but that benefit could be offset by falling productivity. Bringing back low-wage, low-skill jobs, such as garment manufacturing, may create employment—but at the cost of moving the economy away from high-value sectors like tech and services.
 

Could a global demand rebound save the plan?

A more optimistic scenario would see America’s trade deficit shrink because of rising exports, driven by stronger demand in countries like Germany and China. But both nations have historically resisted a shift toward consumer-driven growth. Even if they did, they might prefer services, energy, or agricultural imports over American-made goods—if they remain willing to trade with the U.S. at all.

After months of tariff disputes and diplomatic strain, many allies are questioning the reliability of American partners. That adds to the challenges facing any potential export boom.

A risky transformation with political consequences

In theory, Trump’s vision is focused on restoring the dignity of work and revitalizing domestic industry. But the U.S. economy has long been shaped around consumers and capital flows—not labor-intensive production.

Shifting that dynamic could fulfill a political promise. Yet if it means higher inflation, fewer choices, costlier debt, and shrinking stock portfolios, it’s the American public and investors who will foot the bill.

Stay tuned to The Horizons Times for in-depth analysis on trade policy, market impact, and the global response to U.S. economic strategy.