Tariff turmoil: One key data Trump ignored (or missed out) in trade deficit debate, 3 outcomes to expect

In an increasingly volatile world beset by the tariff turmoil spiralling out of control, the term "deficit" is often mentioned.

Another term, Most-Favoured Nation (MFN), is gaining renewed attention amid a looming demand destruction, heightened recession risk and massive job losses.

This comes after the US under President Donald Trump imposed sweeping new "reciprocal" tariffs on goods imported from countries including China, Japan and India.

Trump points to the huge trade deficit the US has with these countries.

What is a trade deficit?

A trade "deficit" is the difference between what a country imports and exports. Its flipside: trade "surplus".

In 2024, the US ran a trade deficit of $295 billion with China, as per BBC. That's a huge amount, equivalent to around 1% of the US economy. With India, the US recorded a $45.6 billion deficit in 2024, a $2.3 billion (5.3%) increase over 2023.

Goods trade vs services trade

It turns out that when you buy anything online — a movie (Netflix), a service (Microsoft package), iTunes (Apple), Spotify, Google service — from a US company, that does not count as part of the goods trade.

Rightly so, because it's part of the global services trade.

Here's what it means means: the goods trade deficit represents only half of the overall "trade deficit" picture that the current US government is so focused on.

It does not count digitally deliverable services: software (think apps), cloud computing (think Tesla "full self driving" [FSD] subscription), financial services (think online trading fees), and digital media (think Google/Facebook ads).

Inward US revenue from these services hit $655.5 billion and a surplus of around $266.8 billion on their own.

Fact: In 2023, the US exported services worth $1.02 trillion, up 8% from a year earlier, and imported services for $748.2. billion, up 5%, as per the Center for a New American Security (CNAS).

That's equivalent to a services trade surplus of $278 billion (2023) enjoyed by the US with the rest of the world.

How 'reciprocal' tariffs on goods undermine real reciprocity:

Surprisingly, the US services trade surplus does not form part of the current rhetoric surrounding Trump's so-called "reciprocal" tariffs, which has sparked a global trade war.

Washington's unilateral moves, US economic experts point out, are anchored solely on the goods trade deficit.

This, they point out, is one-sided. More importantly, it undermines real reciprocity, as well as very principle of "MFN status".

Worse, punitive tariffs could hurt developing nations: prohibitive levy on imports from these economies are neither reciprocal nor strategically sound, say experts.

While tariffs are needed to address trade imbalances and national security, the spiral of retaliation and uncertainty could lead to a situation riminiscent of the 1930s, which eventually led to World War II, warn economists.

Here’s what you need to know:

What is Most-Favoured Nation (MFN) status?

At its core, MFN is a key principle of the World Trade OrganiSation (WTO), ensuring that countries do not discriminate between their trading partners. 

If one WTO member is granted a favourable trade term — such as lower tariffs or fewer import restrictions — it must extend the same treatment to all other WTO members.

How does MFN promote fairness?

As explained by the WTO, MFN is designed to promote fairness and transparency in global trade. 

For example, if Country A reduces its tariffs on steel from Country B to 5 per cent, that same 5 per cent tariff must also apply to steel imports from all other WTO members — unless a special free trade agreement or customs union justifies an exception.

What’s the basis and goal of this principle?

This principle is rooted in Article I of the General Agreement on Tariffs and Trade (GATT). It is, however, often misunderstood. 

“Most-Favoured Nation” sounds exclusive — but it’s counter-intuitive. In practice, it means that no nation is treated less favourably than any other. It is a commitment to non-discrimination, not favouritism.

According to the International Chamber of Commerce, 80 per cent of global trade flows under MFN terms.

How does MFN shape global trade?

MFN status has been instrumental in fostering multilateral trade, reducing global tariffs, and avoiding trade wars. 

Without MFN rules, countries could use tariffs strategically to hurt competitors or reward political allies, creating uncertainty and fragmenting global supply chains.

“MFN rules are the backbone of the multilateral trading system,” says Chad Bown, a senior fellow at the Peterson Institute for International Economics. 

“They reduce arbitrary discrimination and protect smaller economies from being steamrolled by more powerful trading partners”. 

Which countries enjoy MFN status?

Nearly every country in the world currently enjoys MFN status with most of its trading partners through WTO membership.

How do fresh US tariffs challenge the MFN norms?

President Trump’s 2025 tariff announcement, imposing sweeping new import duties on more than 60 countries — including many US allies — marks a dramatic break from traditional MFN commitments. 

While some tariffs are targetted at China, others affect countries like Vietnam, India, Malaysia, the EU and Japan, regardless of existing WTO rules.

What happened to the WTO norms?

Trump's moves are unilateral. They did not invoke WTO dispute settlement mechanisms and without providing MFN-consistent justifications, such as anti-dumping investigations or national security exceptions.

Many trade experts say these actions risk undermining US credibility.

“The United States is now essentially applying discriminatory trade practices,” says Simon Lester, a trade policy analyst at WorldTradeLaw.net. 

“This puts it at odds with its MFN obligations under WTO law”, Lester added.

The EU has called the tariffs “blatant violations” of MFN rules and is preparing to respond through both litigation and countermeasures.

China has already announced retaliatory tariffs, which triggered a further counter-retaliation by Trump.

Nuances of the trade debate

Given the fiery rhetoric and uncertainty, it's important to understand certain nuances in the global trade debate — much of the focus (especially from figures mentioned by Trump) centred on trade deficits in goods like cars and machinery, in which the US is seen on the negative side.

While the US deficit in the trade of goods is substantial, the US president has avoided any mention of the US services trade surplus, which hit $278 billion in 2023.

The US enjoys a persistent growing surplus in services, especially digital services.

To break down the 2023 figures:

A massive chunk of US services trade exports comes from digitally deliverable services — software, cloud, financial services, and digital media. All told, they raked in $655.5 billion for America.

Ignoring these figures amount to warped economics at the very least, and bullying (or selective amnesia) at the very most.

What happens next?

Critics now warn of a shift toward a more fragmented, bilateral trade regime, where power replaces rules.

Cullen S. Hendrix, writing for the Peterson Institute of International Economics (PIIE), stated: “The April 2 tariff spree could cripple developing economies.”

Moreover, Hendrix pointed out, “they ignore the basic realities” – of capacity, resource endowments, and geography. 

“The new tariffs do not mirror the tariffs those countries impose on US exports – nor do they account for the vastly different economic conditions and fiscal realities that shape tariff regimes in poorer countries.”

Outcome of Trump’s departure from MFN-based trade policy:

#1. Global retaliation:

Countries affected by the tariffs (China and the EU) have announced retaliatory duties, while Japan and others have requested WTO dispute consultations.

#2. WTO credibility erosion:

With the US — the WTO’s largest economy — sidestepping MFN commitments, the rules-based trading system is at risk of further weakening.

#3. Market uncertainty:

Businesses and consumers now face increasing unpredictability. Without MFN protections, supply chains could shift, prices could rise, and the costs of doing business in industries like electronics, autos, and agriculture may spike.

[Source: Peterson Institute for International Economics]

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