A Quick and Dirty Lesson about the Trade Deficit



Daniel J. Ikenson | CATO Institute

The trade balance is calculated as the difference between the value of U.S. exports and the value of U.S. imports. The United States “runs a trade deficit” when Americans purchase more goods and services from foreigners than foreigners purchase from Americans.

To be more precise, the trade deficit is the amount by which the total value of purchases of U.S. consumers, businesses, and governments from foreign suppliers exceeds the total value of purchases of foreign consumers, businesses, and governments from U.S. suppliers.

The trade deficit gets a lot of negative attention. It’s got a bad reputation—probably because it’s called a “deficit.” Sounds like something that needs fixing. But the truth is that the trade deficit has a lot going for it. It’s just, well, misunderstood.

Over the years, my colleagues and I have written extensively about the real meaning of the trade deficit; that it is not a reflection of trade policy; that it is to be expected for a country whose government issues the world’s primary reserve currency; and that the dollars that go abroad to purchase imports find their way back into the U.S. economy in the form of investment in equities, real estate, factories, other structures, equipment, and corporate and government debt; and that the only portion of that capital inflow from foreigners that current and future taxpayers need to repay is the principal and interest on government debt (which implicates fiscally irresponsible government, not trade).

President Trump, Commerce Secretary Wilbur Ross, White House adviser Peter Navarro, and others in the administration don’t seem to get this. They see trade a zero sum game, with exports as Team America’s points, imports as the foreign team’s points, and the trade account as the scoreboard.

The deficit on that scoreboard (the trade deficit) means that Team America is losing at trade and it’s losing because the foreign team—much like the Houston Astros—cheats. The misguided objective of trade policy for the past three years has been to minimize imports and maximize exports.

And the tools deployed in pursuit of these objectives—sweeping tariffs, withdrawal from a major trans‐​pacific trade agreement, wanton subversion of the international rule of trade law, and compelling partners into renegotiations of trade agreements under the barrel of a gun—have failed to eliminate (or even reduce) that trade deficit.


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