President Donald Trump's sweeping tariffs have failed to cut the United States trade deficit, according to a new study by the German Economic Institute IW seen by Reuters on Friday, October 30, 2026. The Trump tariffs trade deficit verdict lands just four days before the November 3 midterm elections, and it cuts against one of the central promises of the president's economic agenda: that higher import duties would shrink the gap between what America buys from the world and what it sells to it.

Instead, the study finds, the deficit grew. The US goods trade deficit reached $130 billion in August, exceeding its level two years earlier, despite the sweeping import tariffs imposed during Trump's second term. Trade patterns did shift, the researchers note, but the overall imbalance did not shrink. It moved, rather than narrowed, as buyers and suppliers rerouted shipments around the new barriers.

Key Points

• The German Economic Institute IW study, seen by Reuters on Friday, October 30, 2026, finds Trump's tariffs have not reduced the US trade deficit.
• The US goods trade deficit reached $130 billion in August, higher than its level two years earlier despite sweeping import tariffs.
• The European Union's share of the deficit fell to 7 percent from 20 percent in August 2024, while China's share fell to 14 percent from 29 percent.
• Foreign direct investment inflows fell 8.2 percent to $248 billion in 2025, 18 percent below the 2015-2024 average, suggesting reshoring has fallen short so far.
• Job creation lagged the prior administration and inflation remained above the Federal Reserve's 2 percent target, even as growth and AI investment stayed strong.

What Happened

Reuters reported the findings of the IW study on Friday morning, publishing the report's key points after seeing the study itself. The timing matters. With voters heading to the polls on Tuesday, November 3, to decide control of Congress, the economy is the dominant issue of the campaign, and the trade deficit has long been one of Trump's favourite scorecards for whether America is winning or losing on trade.

The headline number is stark. A $130 billion goods deficit in a single month, August, is larger than the comparable gap two years earlier, before the current tariff wave took full effect. That means that, on the study's own measure, the policy did not achieve its headline goal. Tariffs changed who America trades with, and at what price, but they did not close the gap between imports and exports.

The study's broader assessment is mixed rather than uniformly negative. Trump's tax cuts, tariffs and drive to revive domestic manufacturing produced mixed results, the researchers conclude. Gross domestic product growth remained solid and investment linked to artificial intelligence was buoyant. Those are genuine strengths, and they match the official data released this week: the Commerce Department's Bureau of Economic Analysis reported on Thursday that the economy grew at a 3.4 percent annualised rate in the third quarter of 2026, faster than the 2.2 percent recorded in the second quarter and above economists' forecasts.

But the weaknesses identified by the IW study are the ones voters feel most directly. Job creation lagged the prior administration, the study finds, and inflation remained above the Federal Reserve's 2 percent target. The Fed's preferred inflation gauge, the personal consumption expenditures price index, jumped 3.6 percent in September from a year earlier, according to data released on Thursday, a sign that price pressures are still far above the central bank's goal.

Background: Why the Deficit Was Supposed to Shrink

The logic behind the tariff strategy was straightforward, and the administration has repeated it for years. Duties on imports would make foreign goods more expensive, push American buyers toward domestic suppliers, and force trading partners to open their markets or build factories in the United States. A smaller trade deficit would follow, along with more manufacturing jobs at home.

The IW findings suggest that logic has only partly worked. Trade patterns did shift, and sharply. The European Union's share of the US goods deficit fell to 7 percent in August from 20 percent in August 2024. China's share fell even more dramatically, to 14 percent from 29 percent over the same period. On paper, that looks like the tariff strategy working against America's two largest trading partners.

The catch is that the deficit as a whole did not fall. When trade with one partner shrinks, trade with others can grow to take its place, as supply chains reroute through third countries or as American demand for imports simply stays strong. A strong domestic economy, fuelled by consumer spending and the AI investment boom, keeps buying from abroad. Consumer spending, which accounts for more than two-thirds of US economic output, rose 3.8 percent in the third quarter, according to the Commerce Department data, and business investment grew 12.7 percent, accounting for more than half of total growth. An economy growing that fast tends to import more, not less.

The reshoring side of the story is also weaker than promised, according to the study. Efforts to bring manufacturing back have so far fallen short, the researchers write. Foreign direct investment inflows fell 8.2 percent to $248 billion in 2025, 18 percent below the average for 2015 to 2024. If foreign firms were rushing to build American plants to jump the tariff wall, the investment data does not yet show it.

Trump Tariffs Trade Deficit: What the Numbers Mean

Economists have long warned that the trade deficit is a poor scorecard for economic health, because it reflects the gap between national saving and investment as much as trade policy. A country that invests heavily and consumes strongly will tend to run a deficit, even with high tariffs, because it must borrow from abroad to fund that spending. The IW study does not settle that academic debate, but its numbers give the sceptics fresh ammunition: the deficit rose even as tariffs reached levels not seen in generations.

The debt backdrop makes the finding more sensitive. The study warns that the US-Israeli war against Iran is increasing already high public debt and pushing up interest rates, with creditors questioning whether the United States can sustain its outstanding debt of $40 trillion. Higher interest rates raise borrowing costs for households, businesses and the government itself, and they complicate the Federal Reserve's job. The Fed on Wednesday left its benchmark interest rate unchanged in the 3.75 to 4.00 percent range for a second meeting in a row, while acknowledging that inflation remains too high, and investors largely expect a quarter-point increase at the December meeting.

For households, the combination is familiar and unwelcome: strong headline growth, but prices still rising faster than the Fed wants, gasoline still above $4 a gallon on average amid the Middle East conflict, and a savings rate that fell to just 4.1 percent of after-tax income in the third quarter, the lowest in nearly four years. Polls have consistently shown that Americans are unhappy with the cost of living, even as the official growth figures look robust.

Reactions: A Mixed Report Card, Read Two Ways

The IW study itself offers no direct quotations from administration officials, and Reuters published only its key points, so the political reaction will unfold in the coming days. But the battle lines are already clear from the findings themselves. Supporters of the tariff strategy can point to the genuine shifts in trade patterns: the EU and China shares of the deficit have fallen sharply, which is exactly what the duties were designed to do to those partners. They can also point to the solid growth and buoyant AI investment that the study itself acknowledges.

Critics will point to the bottom line: the deficit itself is bigger, not smaller; job creation has lagged; foreign investment has fallen rather than risen; and inflation is still above target. For Democrats campaigning in the final days before the midterms, that combination is a ready-made argument that the tariff policy has raised costs without delivering its promised payoff. For Republicans, the counter-argument is that reshoring takes time, that trade deals concluded this autumn, including the agreement sealed with China in Busan this week, will take months to show up in the data, and that the growth figures prove the broader agenda is working.

What neither side can dispute is the study's central fact: as of August, the goods deficit stood at $130 billion, above where it was two years earlier. That number will now follow the president into the final weekend of campaigning, when he is due to hold a rally in Daytona Beach, Florida, on Friday night, before a run of tele-rallies across nearly 20 states replaces the cancelled in-person events in Kansas and Iowa.

Why It Matters

The trade deficit matters politically far beyond its economic significance, because Trump made it a symbol. For a decade he has presented the deficit as evidence that other countries were taking advantage of America, and tariffs as the tool to stop it. A respected German research institute concluding that the deficit grew anyway, on the eve of an election that will decide control of Congress, is therefore a political problem as much as an economic one.

It matters economically too, because the findings touch every part of the current policy mix. If tariffs are not shrinking the deficit, their costs, in the form of higher import prices feeding into inflation, become harder to justify. If foreign investment is falling, the reshoring story needs more time or more support. And if public debt is rising toward $40 trillion while war spending pushes interest rates higher, the fiscal room for further tax cuts or subsidies narrows.

The timing also matters for the Federal Reserve. With inflation at 3.6 percent on the PCE measure and growth at 3.4 percent, the central bank faces an economy that is neither cooling nor comfortably stable. A December rate increase, widely expected by investors, would raise borrowing costs further, just as households are saving less and spending more to keep up with prices.

What Happens Next

The next hard data will come with the September and October trade figures, which will show whether the August deficit was a one-month spike or the start of a trend. The Commerce Department's trade reports, delayed in part by the data calendar around the autumn, will be watched closely by both campaigns and by markets.

Watch also for the administration's response to the IW study itself. A detailed rebuttal, with the administration's own trade figures, would be the normal course, and the White House has in the past challenged outside assessments of its tariff record. Any such response will be measured against the same numbers: the $130 billion August gap, the EU and China shares, and the $248 billion investment inflow.

Further ahead, the trade deals struck this autumn will be tested by the data. The agreement with China sealed in Busan, which cut overall US tariffs on Chinese goods, and the continuing talks with partners including India, are designed to lock in new patterns of trade. If those deals hold, the composition of the deficit may keep shifting. Whether the total shrinks is a different question, and the IW study suggests it will take more than tariffs alone to answer it.

Frequently Asked Questions

What did the IW study find about Trump's tariffs?

It found that Trump's economic agenda delivered solid growth and buoyant AI investment, but failed to reduce the trade deficit: the US goods deficit reached $130 billion in August, above its level two years earlier.

How much did the EU and China shares of the deficit change?

The EU share fell to 7 percent from 20 percent in August 2024, and China's share fell to 14 percent from 29 percent, showing trade patterns shifted even as the overall deficit grew.

What happened to foreign investment in the United States?

Foreign direct investment inflows fell 8.2 percent to $248 billion in 2025, 18 percent below the 2015-2024 average, which the study presents as evidence that reshoring has so far fallen short.

Why does the study mention public debt?

It warns that the US-Israeli war against Iran is adding to already high public debt and pushing up interest rates, with creditors questioning whether the US can sustain debt of $40 trillion.

What does this mean for the midterm elections?

With voting on November 3, the findings give Democrats a fresh argument that tariffs raised costs without shrinking the deficit, while Republicans can point to strong growth and shifting trade patterns as evidence the strategy needs more time.

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Sources: Reuters report on the German Economic Institute IW study, October 30, 2026; US Commerce Department Bureau of Economic Analysis third-quarter GDP and personal income data, October 29, 2026; Federal Reserve October 28, 2026 rate decision.