Some Links
Scott Lincicome explains “things everyone should know about trade deficits.” Six slices:
For starters, there’s little obvious connection between the U.S. trade balance and economic output (gross domestic product). As shown in the chart below from a recent Cato essay on the trade balance, the relationship between higher trade surpluses (or smaller deficits) and higher GDP growth is practically nonexistent.
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Second, one can’t judge whether a trade deficit is a problem without considering its underlying macroeconomic causes and how related foreign capital inflows are used. If those inflows are caused by a nation’s young population and its attractiveness as an investment destination—and if they’re invested productively in things like education, housing, or research—then the resulting trade deficit would be benign. If, on the other hand, the trade deficit is primarily driven by an elderly citizenry’s debt-financed consumption and by profligate government spending, then it could be more of a concern. In either case, however, the trade deficit remains a symptom, not a cause, of a nation’s underlying economic issues.
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Aside from our government’s runaway deficit spending, none of the drivers of the U.S. trade deficit is necessarily “bad” for the U.S. economy, and many of them—portfolio investment, foreign direct investment, etc.—are objectively good and indicative of a thriving economy. (And before you ask, U.S. household debt is mostly home mortgages and has actually been trending down since the mid-2000s, while corporate debt has been basically flat for decades.)
This also explains why no serious economist thinks tariffs or trade deals will significantly reduce, no less eliminate, the U.S. trade deficit. As I explained last September, “Tariffs can reduce both imports and exports, reducing a nation’s overall level of trade but leaving its trade balance unchanged in the long run”—a conclusion supported by research on dozens of different countries and the United States’ own experience during the first Trump term.
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Even imported consumer goods can boost U.S. output. Companies tasked with moving or selling imported items—in wholesale trade, retail trade, and transportation and warehousing —generate trillions of dollars of additional U.S. economic output. By reducing retail prices, moreover, imports can free consumer dollars for spending on American goods and services. And, as already noted, dollars spent on imports quickly return to the United States as either investment in U.S. assets or purchases of exports, both of which contribute to economic growth.
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It’s similarly wrong to assert—as our president often does—that the U.S. trade deficit represents a loss of wealth for the United States or some kind of national “debt.” For starters, this ignores that dollars we send abroad to foreigners buy us real goods and services that we value (or else we wouldn’t buy them), and that—as discussed above— those same dollars eventually return to the United States as investment in the U.S. private or public sector (by mostly unrelated people). Some call the latter a “debt” we Americans must repay, but in many cases—portfolio investment, foreign direct investment, real estate, and basically anything else that isn’t actual public debt—that’s not really true. Corporate debt, for example, is owed by shareholders and employees of the company at issue, not by you and me. Foreign purchases of equity (stocks), property, or even entire U.S. companies isn’t “debt” at all—and can benefit most Americans and the nation if the investment spurs more hiring/production/innovation, causes stocks to rise, or causes similar, American-owned assets (e.g. property) to appreciate too. It’s not zero-sum.
Evidence backs up the theory.
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Another huge and common mistake is using bilateral trade balances—e.g. the U.S. trade deficit with China—as indicative of economic problems or as some sort of trade policy scorecard. (One misguided soul even went so far as to suggest recently that the U.S. “trade deficit with a country may serve as a proxy for the level of imbalance in trade policies and the level of reciprocal tariff.” Yikes.)
Most basically, the world has more than two countries, so—just as my trade deficit with my grocery store tells us almost nothing about my overall financial position—a U.S. trade deficit with, say, Mexico tells us almost nothing about our own economy.
There’s also the fact that as countries develop, their economies naturally shift first from agriculture to manufacturing and then from manufacturing to services. This is exactly what has happened in every wealthy nation on earth. In addition, for a country to become richer — and be able to increase the wages of its population as we have since the 70s — industries across the board must become more productive. This is what happened in manufacturing across almost every nation on the globe. In fact, American industrial output is near its all-time high, which it hit in September 2018, just as Trump’s first round of tariffs was taking full effect. But this production is now done with more and better machines and fewer workers — which is why productivity has skyrocketed and real wages have risen.
Beyond the MAGA echo chamber, Mr. Trump’s tariffs are unpopular. But businesses don’t want to challenge them in court because they are afraid of retaliation. Nor do Democratic state Attorneys General, perhaps because they want to preserve a future Democratic President’s flexibility under the law to declare climate an emergency to impose carbon tariffs.
While House Republicans can run from a vote, they can’t hide from voters in 2026 who may not find Mr. Trump’s tariffs beautiful.
Also critical of Congress’s refusal to rein in Trump’s tariff madness is Reason‘s Eric Boehm.
GMU Econ alum Dominic Pino understands that a trade war will harm America’s heartland.
Charles Cooke wonders if Donald Trump knows why he was elected.
Jack Nicastro reports that the Trump administration is continuing the Biden administration’s economically ill-informed, politicized use of antitrust. Here’s his conclusion:
[Geoff] Manne tells Reason that the “new proposal shows that the DOJ under President Donald Trump intends to continue the highly politicized approach to Big Tech antitrust.” A substantive continuation of the anti-Big Tech antitrust policy begun by the first Trump administration and intensified under former President Joe Biden bodes poorly for domestic investment, innovation, and consumer welfare.
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