Trade Deficits: Good or Bad?
The U.S. trade deficit with the rest of the world has been getting a lot of attention lately. In January, the deficit was estimated to be $56.6 billion, the highest level in nearly a decade. President Trump believes the trade deficit is bad and argues the U.S. is losing to other countries with which it trades. Accordingly, he believes the U.S. must renegotiate trade agreements and enact tariffs on imported goods to rectify the large deficits. The President’s arguments raise two questions: Are trade deficits inherently bad? And, is the U.S. losing to the rest of the world by having such large trade deficits?
In response to the first question, a trade deficit is neither inherently good or bad. It is simply a financial accounting of the flow of goods and services between one country and the world. Thus, the U.S. trade deficit means U.S. citizens and businesses import more goods or services than they export. It is analogous to accounting for one’s transactions with a grocery store—most people purchase more groceries from the grocery store than they sell to it, resulting in a trade deficit with the store.
The U.S. economy is consumer-driven, and Americans are more prone to spend than save. This means imports are needed to meet consumer demands. Thus, the U.S. trade deficit is more the result of underlying economic conditions than any other factor. When the economy grows, consumers are spending, and the U.S. trade deficit widens. When the economy slows, consumers cut back spending, and the trade deficit narrow. The U.S. tends to run an ongoing trade deficit with the rest of the world because it is the world’s largest, most open, dynamic economy. A growing trade deficit, if anything, is indicative of the underlying condition of the U.S. economy.
In response to the second question, the U.S. isn’t a loser or winner because it has a trade deficit. Countries do not trade. People and businesses trade—it is the central Nebraska popcorn producer who sells to a theater chain in Mexico or the southwest Nebraska grain elevator that ships wheat to the west coast for export. When trade happens, buyers and sellers are both satisfied or the transaction wouldn’t occur. And presumably, both parties are made better off by the transaction. The sum of all these transactions equals either a trade surplus or deficit. There are losers from trade—producers who are unable to compete with imported products. A trade deficit, though, isn’t the reason for losses due to trade. Rather, it is the result of competition in the marketplace for that product.
A trade deficit is not a sign of bad trade agreements, unfair trade practices, or a lack of American competitiveness. It is an accounting of the billions of transactions by individuals and businesses across the globe wanting to improve their economic condition.