The AI boom's hidden cost: a bigger trade deficit
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The AI buildout is the new, powerful force widening America's trade gap.
Why it matters: Shrinking the trade deficit and winning the AI race rank high on President Trump's economic agenda — but those aims are pulling in opposite directions, as AI-related products get a lighter tariff treatment.
The intrigue: "[T]rade in AI-related products is a very important force behind U.S. trade over the past year," Minneapolis Federal Reserve economist Michael Waugh wrote in a new paper.
- "In fact, it might be even more important than dramatic changes in U.S. trade policy in 2025."
By the numbers: The paper finds that the U.S. goods trade deficit — which hit a record high in 2025 — would have been about $200 billion smaller last year absent the AI boom.
- AI-related imports accounted for 23% of all U.S. imports last year, up from 15% in 2023. The category has grown more than 70% over that period, compared with just 3% growth for other imported goods.
Zoom in: Compute hardware — GPUs, processors, memory — accounts for roughly half of AI-related imports in Waugh's analysis.
- The other half is a broader basket of products (electrical infrastructure, networking equipment and cooling systems) that are essential to the physical data center buildout.
What they're saying: "You can see there's this tension here — we want the AI buildout, but we also want smaller trade deficits," Waugh told Axios last week.
- "Maybe in the long run, this doesn't become a conflict," he added, if domestic manufacturing of AI inputs revs up.
Waugh said the paper grew out of a question that Minneapolis Fed president Neel Kashkari kept raising internally: Why hadn't trade with Mexico fallen despite the tariffs?
- Mexico is the single largest source of AI-related imports — accounting for roughly 25% — because its role extends into electrical, cooling and networking equipment. Taiwan is the leading source of compute hardware.
- U.S.-bound goods from Mexico rose more than 6% last year, while imports from Canada fell, despite facing the same tariff treatment — a divergence largely attributed to Mexico's surging AI-related exports, Waugh found.
Between the lines: The administration has largely shielded AI-related products from its tariff regime.
- Waugh found that 69% of AI-related imports, by value, fall on at least one exemption list. By the end of last year, AI-related goods faced an effective tariff rate of 4.5%, compared with 12.1% for non-AI-relevant goods.
- The gap widened after the April 2025 "Liberation Day" tariff actions carved out exemptions for consumer electronics and other core AI inputs.
What to watch: The paper doesn't separate price effects from volume, meaning that the AI-related import surge may reflect, in part, higher prices.
- The AI buildout is competing with the rest of the economy for the same inputs: Cooling systems needed for data centers are the same ones going into apartment buildings and office towers.
- That demand pressure spills over into prices for everyone — a short-term inflationary force that cuts against the disinflationary wave many are betting AI will eventually deliver.
The bottom line: Whether the exemptions shielding AI-related products from tariffs persist "has important implications for the cost and pace of the AI buildout," Waugh wrote.
Editor's note: This story has been updated to include that Michael Waugh talked to Axios last week.
