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


February 06, 2018


When U.S. trade data for 2017 is released today, Americans may be subjected to alarmed press accounts about the U.S. trade deficit, and some elected officials will likely join in. In today’s economic debates, the trade balance seems to lie at the center of many people’s concerns.

But it shouldn’t. The trade deficit is a poor measure of whether a particular set of trade policies—or trade agreements—is delivering benefits to the American people.

The vast majority of economists agree that “foreign import barriers and exports subsidies are not the reason for the US trade deficit,” as Martin Feldstein, who chaired President Ronald Reagan’s Council of Economic Advisers from 1982 to 1984, recently wrote. He summarizes:

The real reason is that Americans are spending more than they produce. The overall trade deficit is the result of the saving and investment decisions of US households and businesses. The policies of foreign governments affect only how that deficit is divided among America’s trading partners.

Exactly. The low U.S. private savings rate relative to the private investment rate and the federal government’s large fiscal deficits together produce a savings gap, which is met by the federal government through the issuance of Treasury securities and by private companies through the issuance of stocks and bonds. Some of these securities are purchased by foreigners, so the domestic savings gap is met by importing savings from abroad.

In this manner, the United States is able to finance ongoing consumption and capital spending above and beyond its current savings. Foreign capital inflows also help keep the cost of credit low, which allows the federal government to finance its deficits, allows American businesses to finance investment, and allows American families to finance mortgages and consumer loans − all at less cost. All of this enhances the U.S. standard of living.

In fact, a trade deficit is often a sign of economic good health, signaling that purchasing power is strong and consumers are optimistic enough to spend—just as we are seeing today. Historically, the U.S. trade deficit has expanded when the U.S. economy has grown faster than those of our major trading partners, as in the expansions of the 1980s and 1990s. By contrast, the U.S. current account has moved in the direction of a surplus in recessions, as happened in the Great Depression and the 2007-2009 recession.

The U.S. trade deficit reflects broad macroeconomic factors, not foreign trade barriers. Examining the relationship between trade balances and trade barriers across 125 countries, researchers at the Peterson Institute for International Economics found that “between 2003 and 2014, those with higher tariffs generally had bigger current account deficits or smaller surpluses than others…. They couldn’t find any statistically meaningful link between the two.”

Indeed, the countries with the highest trade barriers tend to have trade deficits. According to 2016 data from the Geneva-based International Trade Center, 21 of the 25 countries with the highest average applied tariffs have merchandise trade deficits.

The United States is unlikely to find relevant lessons for its own economic policies from Kiribati, Equatorial Guinea, Chad, and Gabon—the four high-tariff countries on the list with trade surpluses. Conversely, the economies with the lowest tariffs and other trade barriers, such as Singapore and Hong Kong, are among the most prosperous in the world.

Critics frequently claim that U.S. trade agreements have produced trade deficits, but it just isn’t true. Looking at trade in goods and services, the United States has run a cumulative trade surplus of $25 billion with our 20 trade agreement partners as a group over the past five years (2012-2016). (The country breakdown for 2017 services trade data won’t be available until the fall, so we can’t yet make a complete assessment for 2017.)

Much of today’s trade debate focuses on trade in manufactured goods, but here too the story is often misrepresented: Over the past decade (2007-2016), the United States ran a cumulative trade surplus in manufactures of $241 billion with our 20 trade agreement partners, according to the U.S. Department of Commerce Trade Stats Express site.

At the end of the day, it’s complicated. But one thing is certain: 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, 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.

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