John G. Murphy John G. Murphy
Senior Vice President, Head of International, U.S. Chamber of Commerce


February 14, 2017


Over the years, Americans have read a steady stream of alarmed press accounts of the U.S. trade deficit. In today’s economic debates, it seems to lie at the center of many people’s concerns. Should it?

In fact, the trade deficit is widely misrepresented. To get a better understanding, it helps to look at the trade balance from different perspectives:

1. When You Put It in Personal Terms…

I have a trade deficit with my grocery store, local lunch spot, hardware store, gas station, barber, and every other place of commerce I frequent. The exception is my employer, with whom I have a trade surplus: My employer pays me for my labor and thus has a trade deficit with me.

This isn’t a novel observation, but it does underscore that specialization and exchange are the fundamental underpinnings of our modern economy.

When the first civilizations emerged in Mesopotamia and Egypt thousands of years ago, people saw the advantages of specialization in farming, potmaking, weaving, or metalworking. It remains a fact that, by dedicating all our working hours to a specific trade, we get better at it.

And we exchange what we produce for what we don’t. Today, most of us produce very little that we consume directly. Trade is essential because a steelworker wouldn’t want to be paid in steel any more than an insurance salesman would want to be paid in kind: You can’t eat I-beams or annuities.

And keeping track of our “bilateral trade deficit” with one establishment or another tells us very little about whether we are prospering.

2. When You Look in the Mirror…

Any economist will tell you that a current account deficit (of which a trade deficit is usually the largest component) is always mirrored by a capital account surplus.

In economics, this is called an identity: They are two sides of the same coin.

The current account records trade in goods and services and net earnings on foreign investments. The capital account records international investments themselves (as opposed to earnings on them), both inbound and outbound.

How do we know the two sides of the coin will match? Because buyers must match sellers for the dollar foreign exchange market to clear. Exchange rates and interest rates adjust to ensure the capital flows match the trade flows.

When the combination of governmental borrowing and private investment exceeds a country’s savings—in other words, when the country becomes a net recipient of foreign investment—this capital account surplus is mirrored in its national accounts as a current account deficit.

Making value judgments about these issues can leave you tied up in knots: After all, isn’t receiving job-creating foreign investments a good thing? How can that be the case if it necessarily implies a trade deficit? In fact, it’s too simple to call one good and the other bad.

3. When It’s an Echo…

Many economists describe the trade deficit as an echo of our fiscal deficit, which arises when the government spends more money than it takes in. Since 1930, the federal government has run a fiscal or budget deficit in all but eight years.

If the government balanced its budget, the trade deficit would shrink and possibly become a surplus. And unlike the trade deficit, the budget deficit is under the direct control of our elected officials.

Similarly, as noted above, our trade deficit—or more properly, the U.S. current account deficit—can also be seen as an echo of our low domestic savings rate.

4. When It Grows or Shrinks…

Many factors influence the size of the trade deficit. For example, our trade deficit grows when our economy grows faster than those of our trading partners, and vice versa.

The U.S. trade deficit has tended to expand during periods of vigorous economic growth and job creation, as it did in the expansions of the 1980s and 1990s. In this sense, a growing trade deficit signals that the U.S. economy is outperforming those of its trading partners, and so, as more people get jobs and earn more, they have more to spend, and they spend some of it on imports.

As The Wall Street Journal has noted: “During economic slowdowns the deficit shrinks, as after the 2008 financial crisis. It even turned into a surplus during the 1990-1991 recession and the Great Depression.”

So, one sure way to bring down the trade deficit would be to trigger a deep recession. That doesn’t make much sense, does it?

5. When It Isn’t Even There…

Critics frequently claim that U.S. trade agreements have produced trade deficits, which they say lead to job losses.

But it’s just not true. Looking at trade in goods and services for each of the past four years (2011-2015), the United States has had a modest trade surplus with its 20 trade agreement partners as a group. (2016 services trade data won’t be available until the fall, so we can’t make a complete assessment for last year.)

Source: U.S. Department of Commerce--merchandise trade data; services trade data.

Source: U.S. Department of Commerce--merchandise trade data; services trade data.

Much of today’s trade debate focuses on trade in manufactured goods, but here too the story is often misrepresented: Over the 2008-2015 period, the United States ran continuous trade surpluses in manufactures with these 20 countries as a group. Over these eight years, the cumulative total of this trade surplus reached $284 billion, according to the U.S. Department of Commerce Trade Stats Express site.

At the end of the day, it’s complicated. But the trade balance is a poor gauge of whether a nation is prospering or whether its trade policies are fostering economic growth and job creation. Perhaps policymakers should look upon the issue with more calm, less consternation, and more, well, balance.

About the authors

John G. Murphy

John G. Murphy

John Murphy directs the U.S. Chamber’s advocacy relating to international trade and investment policy and regularly represents the Chamber before Congress, the administration, foreign governments, and the World Trade Organization.

Read more