Sep 06, 2016 - 1:30pm

Trade Deficit Follies

Senior Vice President for International Policy

Over the years, Americans have grown accustomed to alarmed press accounts about the U.S. trade deficit. But several years ago — for the 20 countries with which the United States has entered into a trade agreement — the trade deficit vanished.

That’s right: It disappeared. Unnoticed at the time, the United States recorded a trade surplus with its 20 trade agreement partner countries in 2012. And again in 2014.

Is this a big deal? No and yes.

No, because the trade balance is a poor measurement of whether a nation is prospering. As the Wall Street Journal has written:

…running a trade deficit—that is, having more imports than exports—isn’t necessarily bad. In the U.S. it can signal economic health: that American consumers and businesses are saving money by buying cheaper foreign goods, and that the U.S. economy is attracting overseas investment, which drives productivity and demand for domestic and imported goods.

In recent decades, the U.S. trade deficit has tended to expand during periods of vigorous economic growth and job creation (e.g., the late 1990s). And as the Journal notes: “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.”

As taught in any Economics 101 course, when a country invests more than it saves, the shortfall appears in its national accounts as a trade deficit.

Making value judgments about these issues can leave you tied up in knots: After all, what policymaker doesn’t like both investment and savings? By the same token, exports drive growth, but so do imports of machinery for a factory or IT products that enhance our productivity.

Many economists will say you shouldn’t worry about the trade balance. But this has never stopped economic isolationists from claiming that trade agreements lead to trade deficits, which lead in turn to job losses. Organized labor, their think tank allies, and a handful of members of Congress have specialized in trade deficit fear-mongering in recent years.

And there’s the rub, because the emergence of a trade surplus with America’s trade agreement partners pulls the rug out from under the isolationists’ favorite argument.

It’s easy to see how trade agreements might boost net exports. These agreements strip away the foreign tariffs and other barriers that shut out American exports. Meanwhile, the U.S. market is already largely open to imports, with a few notable exceptions (e.g., apparel, footwear, sugar).

For those worried about the U.S. trade deficit, trade agreements are part of the solution—not the problem.

It turns out U.S. manufacturing is a big contributor to this surplus. With regard to manufactured goods, the United States has recorded a cumulative trade surplus with its trade agreement partner countries of more than $280 billion over the past eight years (2008-2015), according to the U.S. Department of Commerce Trade Stats Express site.

Also over the past five years, the shale revolution has transformed the U.S. energy sector, leading the United States to import less oil and gas, including from our trade agreement partners. At the same time, U.S. exports of refined products such as gasoline and diesel have expanded.

Meanwhile, U.S. agricultural exports have exceeded imports since 1960, generating a surplus in U.S. agricultural trade, according to the U.S. Department of Agriculture.

The final piece of the puzzle is U.S. trade in services. The United States is home to thousands of world-beating companies in a variety of services industries, from insurance to audiovisual, from IT and software to transportation and logistics. U.S. services exports topped $$716 billion in 2015—leading the world—with a surplus of $227 billion.

Parsing all these numbers is challenging because country-specific services trade data are released months after country-specific data for merchandise trade (in fact, these services data for 2015 won’t be released until October 2016). The federal government never really adds them together. But we’ve done so below.

Bottom line: For those worried about the U.S. trade deficit, trade agreements are part of the solution—not the problem. 

Source (Services Data): U.S. International Trade by Selected Countries and Areas, Balance on Services:

Source (Merchandise Data): TradeStats Express - National Trade Data, International Trade Administration, U.S. Department of Commerce:

*The United States has entered into trade agreements with 20 countries: Australia, Bahrain, Canada, Chile, Colombia, Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, Israel, Jordan, Mexico, Morocco, Nicaragua, Oman, Panama, Peru, Singapore, and South Korea.

**Country-specific service trade data is available only for the following U.S. trade agreement partners: Australia, Canada, Chile, Israel, Korea, Mexico, and Singapore. The other trade agreement partners are relatively small services trade partners, but it appears very likely the United States runs consistent trade surpluses in services with these countries as well. (Israel is an exception, perhaps in part because the 1985 U.S.-Israel Free Trade Agreement has no provisions on services trade.) As a result, it is likely that the U.S. trade surplus in services for trade agreement partners in this table is underestimated by billions of dollars. 

About the Author

About the Author

Senior Vice President for International Policy

Murphy directs the U.S. Chamber’s advocacy relating to international trade and investment policy.