September 23, 2018

The Trade Deficit is Our Strength, Not Our Weakness

President Trump sees every U.S. trade deficit as a clear sign that the U.S. is being treated “unfairly” and “ripped off.”

The latest figures released last week showed a significant increase in our trade deficit in goods and services with the world and record deficits with China and the European Union. The U.S. is currently on track for its largest annual trade deficit since 2008.

Yet, despite President Trump’s belief that trade deficits go hand-in-hand with a weak economy, just the opposite is occurring. The U.S. is experiencing increases in manufacturing, overall GDP growth, and, at last, wage growth.

Why is the U.S. trade deficit at record levels, despite the Trump administration’s aggressive actions against what he considers unfair trade deals and practices?

Simply put, trade deficits are driven far more by broad economic conditions — such as how U.S. economic growth compares with other countries’, U.S. and other countries’ savings and investment rates and the value of currencies — than by tariffs and trade barriers.

A country’s trade balance for a given period is essentially the difference between the value of the goods and services produced at home that it sells abroad and the goods and services it buys from abroad. The trade balance does not reflect — especially for a country like the U.S. — that imports are often used as inputs for goods produced for export.

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