Why Tariffs Haven’t Balanced Out Global Trade

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0:33Violence in Mexico after authorities hunt and kill a cartel boss. Plus, a second wave of protest builds in Iran. And as President Trump doubles down on tariffs, we'll hear why his signature policy isn't shrinking the trade deficit. The big exporting economies like China, Germany, South Korea, Japan, have been moving in the opposite direction. So rather than try and restructure their own economies to rely more on local demand and less on exports. They've doubled down on exports. It's Monday, February 23rd. I'm Daniel Bach for The Wall Street Journal, filling in for Luke Vargas. And here's the AM edition of What's News, the top headlines and business stories moving your world today.

1:19We begin in Mexico, where the killing of the country's most powerful drug kingpin in a raid by the Mexican military has sparked a wave of violence across the country. The U.S. had placed a$15 million bounty on Nemesio Mencho Oseguera, a former police officer who was the leader of the Jalisco New Generation cartel. His killing marks the most significant operation yet in Mexico's recent crackdown on cartels, which comes as the U.S. has pressured its neighbor to allow the American military to get involved in the fight against drug gangs. Mexico has pushed back on that, but has boosted security and intelligence cooperation.

1:55Oseguera controlled vast swaths territory and was known for sophisticated paramilitary tactics. His gunman responded to his death by burning cars and trucks and blocking roads in Guadalajara, forcing a near shutdown of Mexico's second-largest city yesterday. The U.S. Embassy in Mexico is warning American citizens to seek shelter and minimize unnecessary movement in several Mexican states. Turning now to Iran, where a second wave of popular anger is building, with students holding anti-government rallies over the weekend. According to journal correspondent Jared Malson, the unrest marks the most significant show of defiance since last month's deadly protests.

2:33Tom Fairless:This weekend, you had students on university campuses, especially in Tehran, coming out to protest, chanting for the fall of the regime and also chanting to remember the people who were killed in the crackdown that took place in January, in which thousands of people were killed by government forces. We're not seeing evidence that this is turning into a national challenge to the regime, as we saw in January. But it is significant that people are, again, defying the regime by protesting at all. Meanwhile, the U.S. continues to amass forces in the region, and President Trump finds himself at a crossroads.

3:15Tom Fairless:So this week, the U.S. has another round of negotiations with Iran over its nuclear program and potentially its missile program. However, over the weekend, Trump's special envoy for the Middle East, Steve Witkoff, who is leading the talks for the American side, said that the president is increasingly frustrated, potentially with the fact that the Iranians haven't capitulated in the face of military pressure. And there is a sense that it's increasingly a question of when and not if there will be American military strikes on Iran. That said, the administration has said repeatedly that it wants a deal and the negotiations are continuing for now.

3:56Tom Fairless:And it's clear that the administration wants to hold those negotiations when it is applying an immense amount of pressure on Iran, both militarily and economically through sanctions.

4:09Back in the U.S., a man who tried to breach the secure perimeter at President Trump's Mar-a-Lago home was shot and killed by U.S. officers yesterday. The White House identified the man as Austin Tucker Martin. Authorities said he was in his 20s and had a shotgun and a gasoline canister with him. The President and the First Lady were in Washington this weekend. And more than 9 ,000 flights scheduled for yesterday and today have been canceled due to a major winter storm hitting the U.S. East Coast, with Boston and New York airports affected the most. According to the National Weather Service, very heavy snowfall and strong winds will continue to batter the East Coast today.

4:47Coming up, tariff uncertainty is back. And while President Trump shows no sign of giving up on import duties, we'll hear why they've so far failed to rebalance global trade. That story after the break.

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5:35Uncertainty is hanging over global markets to start the week. Stock futures fell early today, while Asian and European stocks were mixed. That's after President Trump said over the weekend that his global tariff would rise from 10 to 15 percent, aimed at replacing many of the duties ruled illegal by the Supreme Court. The ruling on Friday has left businesses scrambling to figure out whether they can get refunded and whether the new duties could prove costlier. One thing is clear, though, the president seems committed to tariffs as a tool for remaking global trade. But global economics correspondent Tom Fairless reports that so far, the levies haven't had the intended effect.

6:13And he joins me here now. Tom, so what has been the impact to date? Yeah, so one of the rationales for tariffs and one of the central rationales that Trump administration gave is to rebalance global trade and to reduce the large trade deficits that the U.S. has been running for years. That doesn't seem to have happened. There are big rushes in export numbers as exporters try to get ahead of tariffs when the rates rise. But if you look at the 12-month rolling average, the US trade deficit doesn't seem to have changed very much. And some data last week actually showed the US ran a record trade deficit in goods,$1.24 trillion last year.

6:54So in terms of that goal, it doesn't seem to have had the desired effects so far. So why is it that tariffs aren't really moving the needle when it comes to the trade imbalances? I think one reason that that isn't happening is that the counterparts of that deficit globally, the big exporting economies like China, Germany, South Korea, Japan, have been moving in the opposite direction. So rather than try and restructure their own economies to rely more on local demand and less on exports, they've doubled down on exports. They've funneled large amounts of government money into the manufacturing and export sectors to keep the whole thing going, to jump over the tariff wall.

7:36And what does this tell us about the way different economies work and the difficulty in rewiring global trade? One thing it shows is how difficult it is to change the structure of your economy. The export model is very popular in Germany. Their export prowess and their large surpluses, they see it as an economic strength that they want to retain. To try and change that is very difficult. And equally, I think the U.S. benefits from the capital inflows from the rest of the world, which lower interest rates and help to boost consumption in the U.S. OK, Tom, so if the U.S. trade deficit persists, as it has so far, despite Trump's efforts, is it necessarily a bad thing?

8:14And if tariffs don't work, are there other ways of shrinking it? So it's not necessarily a bad thing. It might even be beneficial. Some of that is heavy spending on AI and AI investments. One reason that economists say that the trade and account deficits are so large is because of the large fiscal deficits. And some economists say, well, this is something the US can solve itself. It doesn't need other countries to do much. The US just needs to spend less and reduce its budget. And that will automatically rebalance because there'll be less money for imports. imports. And so trade will rebalance that way.

8:48I think it is also true that other economies are aggravating these imbalances. And the IMF came out last week with a very rare criticism of China's trading policy, where it really was saying that China was using industrial policies and inflating these to support its exports and its current account balance, and was quite critical about that, which sort of confirms that maybe Trump had a point on that. But a lot of economists will say, regardless of that, the U.S. can do a lot to reduce its trade deficit just by reducing government spending. That is global economics correspondent Tom Fairless in Frankfurt.

9:26Tom, thank you so much for this. Thanks so much, Daniel.

9:34And in other news from the markets, exchange-traded funds became America's dominant investment vehicle by being cheap, boring, and pretty safe. These are often passive funds that track things like the S &P 500. But with trillions of dollars flowing into ETFs, some investment firms are taking the opposite approach, selling new, exotic, and riskier offerings. Journal Markets reporter Jack Pitcher says nearly 1 ,000 actively managed ETFs were launched in the past year, many of them with higher fees to boot. In the current environment where we've seen online gambling get really popular, prediction markets get popular.

10:11You're seeing the ETF market become kind of the latest example of the gamification of everything in the U.S. economy. And we're seeing smaller managers that people haven't heard of come in, and they're going with sort of eye catching products, products they're hoping will generate headlines, generate attention. And a lot of times those are really risky. So recently we've seen leveraged funds on a single stock. The idea there is the fund is going to use derivatives to try and double or triple the daily return of a stock. New regulations have made it OK for there to be cryptocurrency ETFs. Once an ETF reaches a certain asset threshold, these managers, they make their money by charging a small fee on total assets.

10:54And if you get lucky, you have a fund become large or extremely successful. There's an opportunity to make quite a bit of money on that management. Assigned at the times in the ETF market, investors in the ProShares Ultra Silver ETF, which aims to double the daily move of silver prices, won on a wild ride after the precious metal hit record highs recently. But when silver prices reversed course and sold off, the fund crashed 60 % in a single day. Even so, the fund still sits above a billion dollars in assets. And that's it for What's News for this Monday morning. Today's show was produced by Hattie Moyer.

11:30Our supervising producer was Christina Rocca. And I'm Daniel Bach for The Wall Street Journal. We'll be back tonight with a new show. Until then, thanks for listening.

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