President Donald Trump and members of his administration claim that international trade is rife with unfair dealing. As a sign of this unfairness they point to the fact that the U.S. buys more goods from many countries than these individual countries purchase from the United States, arguing that such bilateral trade deficits mean that the U.S. is being ripped off.
They claim that the countrys overall trade deficit the sum of the U.S. trade balance with all countries represents economic weakness and a national-security threat. But what can bilateral trade deficits and the countrys overall trade deficit tell us about trading relations and the health of the U.S. economy? Here are some facts:
1. Over the past 50 years, international trade has become an increasingly important feature of the U.S. economy: The U.S. has been running a trade deficit the total value of imports has exceeded the value of U.S. exports every year since 1975. However, this does not represent a decline in U.S. exports. On the contrary: Both exports and imports have more than doubled since the beginning of this period (see the chart below).
As tariffs have been pushing prices higher, I embarked on a mission to avoid them altogether. But is it even possible to tariff-proof my life by buying only products made in the U.S.A.? Heres what I found.
This reflects the greater integration of the U.S. in the world economy, something that has been happening globally world trade relative to world GDP has increased to 63% in 2022 from 26% in 1970. Moreover, there is a high correlation (greater than 90%) between exports and imports typically when U.S. exports to the rest of the world are declining, U.S. imports of foreign goods tend to decline as well.
2. It is normal for a country to have a bilateral deficit with some of its trading partners and bilateral trade surpluses with others: The economist Robert Solow illustrated the irrelevance of bilateral trade deficits by noting that he had a chronic trade deficit with my barber who doesnt buy a damned thing from me. But this does not mean Solows barber was taking advantage of him. Solow simultaneously had a persistent trade surplus with his students who benefited from learning from a Nobel laureate.
There is a similar logic for a countrys trade patterns. Businesses will export those goods and services that can be produced more cheaply or of a higher quality than those of foreign competitors. The U.S. is a major exporter of manufactures (including airplanes and other transportation equipment); fuels and mining products, and many agricultural commodities, among other products. In the same vein, Americans purchase most of their clothes and footwear from foreign suppliers able to produce them at a lower cost.
It is sometimes missed that international trade involves services as well as goods.
It is sometimes missed that international trade involves services as well as goods the Trump administrations formula for tariffs is based on imbalances in only goods trade, and does not take into account trade in services. The U.S. is the worlds leading exporter in services, running a trade surplus in services that reflects its comparative advantage in areas like education, entertainment and finance. In 2024, the U.S. ran a trade surplus in services of $295 billion (and a trade deficit in goods of $1.2 billion).
3. Bilateral trade statistics can be misleading: Exports are recorded as going to the country that initially receives goods, not their final destination. The global integration of supply chains where the components for a final product are sourced from many countries also muddies measures of bilateral trade. Trade statistics record the wholesale price of a final good from a country as the value of its export without taking into account inputs that come from other countries. For example, the full value of an iPhone assembled in China is recorded as an import from China even though its design, software development, project management and other elements of its production are supported by high-wage jobs in the United States, and many other physical components are made in countries other than China (see here and here).
In a world with extensive international supply chains, this can lead to large misassignments of the source of exports. The appropriate assignment of the value added of an import to each country that contributes to its production is difficult to untangle. But research has found that, for example, in 2004 the United States bilateral trade deficit with China based on the value added by Chinese companies to its exports to the U.S. was 40% smaller than the reported bilateral trade deficit that was based on the gross value of goods.
The mirror image of this is that the bilateral trade deficit with Japan based on value added was about 40% larger than the recorded trade deficit. These differences reflect that China was a net importer of inputs to production of goods that saw their way to the U.S. while Japan was a net exporter of these inputs. This type of problem with bilateral trade statistics does not follow through to overall aggregate trade statistics since everything must come from somewhere, so overestimates and underestimates cancel out.
4. An aggregate trade deficit is not by itself evidence of economic weakness: National income, as measured by Gross Domestic Product (GDP), measures the sum of what households consume, investment by firms, government spending and net exports (exports minus imports). Although imports figure negatively in this relationship, this does not literally mean that imports subtract from GDP.
The components of GDP are all interrelated and are driven by other, underlying factors. There are times when stronger GDP growth is associated with increasing trade deficits. For example, during the Reagan boom of 198185, tax cuts and increased defense spending stimulated GDP growth. Stronger growth in national income led to higher consumption and greater investment, including consumption and investment of imports.
At the same time, these policies led to higher interest rates in the U.S., which attracted foreign capital inflows that strengthened the dollar , making imports cheaper and exports more expensive. The dollar appreciation further contributed to the increasing trade deficit.
Alternatively, there are scenarios in which stronger GDP growth could be accompanied by a shrinking trade deficit. For instance, a case in which faster growth abroad draws in exports from the U.S. which shrinks the American trade deficit while driving a higher rate of U.S. GDP growth. These two examples illustrate that there is no consistent theoretical relationship between the trade deficit and GDP growth. In fact, the correlation between net exports relative to GDP and GDP growth over the past half century is essentially zero (-0.6 percent).
5. Over the long term, trade deficits that are persistent reflect underlying economic conditions that contribute to higher levels of imports over exports: A nation that has a persistent trade deficit is one that is consistently spending more than it earns. Much like a household that buys more than it earns, a nation will need to borrow from abroad to fund its higher spending (see here). Persistent trade deficits can lead to a larger or more productive economy over the long term, if spending is for productive investment.
Manufacturing employment as a fraction of total employment has been declining across all advanced economies.
6. Manufacturing employment has decreased in advanced economies over the past two decades regardless of whether they have had trade deficits or trade surpluses: The Trump administration has argued that trade deficits are the source of manufacturing employment decline. Manufacturing employment as a fraction of total employment has been declining in the United States, a country that has run persistent trade deficits.
But manufacturing employment as a fraction of total employment has been declining across all advanced economies. For example, Germany has run persistent trade surpluses over the past three decades, consistently about 4% or 5% of its GDP while it saw a decline in production industry employment by more than one-third.
Part of the reason for this is automation fewer workers are required to produce any given level of manufacturing output. Which is not to say that trade has not had a disproportionately negative effect on some manufacturing-dependent communities. There is evidence that the rapid and massive rise in trade with China harmed some local economies. These effects are strongest in places where an industry has already been phasing out, where wages are relatively high or where education levels are low.
While some countries may engage at times in protectionist measures or provide subsidies to specific industries that result in advantages to some of their domestic industries, bilateral trade deficits are not of themselves evidence that this is the case and, in fact, provide an increasingly unreliable picture in the face of globally integrated production.
Workers whose companies face greater international competition can be hurt by trade, of course, and there are strong arguments for appropriate safety-net policies for them, as there are for those hurt by economic dislocations due to technological change or other disruptive factors. But the fact that trade has become a bigger share of the economy, both for the United States and for the world as a whole, means that disruptions to trade and global supply chains can have a consequential economic impact. For the economy as a whole, both trade deficits and overall growth arise from other, underlying causes and there is no systematic link between bigger trade deficits and slower economic growth.
Michael Klein is a professor of international economic affairs at the Tufts University Fletcher School of Law and Diplomacy.
This commentary was originally published by Econofact Does International Trade Hurt the United States?
More: Trumps tariffs are a no-win for Americans. Heres what needs to happen now.
Also read: As Trumps deadline hits, here are the countries with trade deals, and those without them
