The Trade Deficit Isn’t an Emergency – It’s a Sign of America’s Strength

Blaming foreigners for the trade deficit, therefore, is like blaming the bank for charging a low interest rate. We have a trade deficit because foreigners willingly charge us low interest rates – and we choose to spend that credit.

U.S. Entrepreneurship Attracts Global Capital – and Fuels the Deficit
Another reason for foreigners’ steady demand for U.S. assets is American technological dominance: When aspiring entrepreneurs from around the world start new companies, they often decide to do so in Silicon Valley. Foreigners want to buy stocks and bonds in these new companies, again adding to the U.S. investment surplus.

This strong demand for U.S. assets also explains why Trump’s last trade war in 2018 did little to close the trade deficit: Tariffs, by themselves, do nothing to reduce foreigners’ demand for U.S. dollars, stocks and bonds. If the investment surplus doesn’t change, the trade deficit cannot change. Instead, the U.S. dollar just appreciates, so that imports get cheaper, undoing the effect of the tariff on the size of the trade deficit. This is basic economics: You can’t have an investment surplus and a trade surplus at the same time, which is why it’s silly to call for both.

It’s worth noting that no other country in the world enjoys a similarly sized investment surplus. If a normal country with a normal currency tries to print more money or issues more debt, its currency depreciates until its investment account – and its trade balance – goes back to something close to zero. America’s financial and technological dominance allows it to escape this dynamic.

That doesn’t mean all tariffs are bad or all trade is automatically good. But it does mean that the U.S. trade deficit, poorly named though it is, does not signify failure. It is, instead, the consequence – and the privilege – of outsized American global influence.

The president’s frenzied attacks on the nation’s trade deficit show he’s misreading a sign of American economic strength as a weakness. If the president really wants to eliminate the trade deficit, his best option is to rein in the federal budget deficit, which would naturally reduce capital inflows by raising domestic savings.

Rather than reviving U.S. manufacturing, Trump’s extreme tariffs and erratic foreign policy are likely to instead scare off foreign investors altogether and undercut the dollar’s global role. That would indeed shrink the trade deficit – but only by eroding the very pillars of the country’s economic dominance, at a steep cost to American firms and families.

Tarek Alexander Hassan is Professor of Economics, Boston University. This article is published courtesy of The Conversation.