Why Trade Deficits Don’t Always Mean What Trump Says They Do

It’s fair to say that U.S. President Donald Trump abhors trade deficits. Shrinking them was a cornerstone of his campaign for the U.S. presidency. Once elected, he cited them as the reason for igniting a trade war with China and imposing tariffs on other countries’ exports of steel, aluminum and other products to the U.S. Trump says trade deficits -- the difference between what the U.S. imports and what it exports -- are a sign of a declining manufacturing base and loss of American might. And he blames weak U.S. leaders before him for negotiating bad deals that caused the trade gap to widen. Problem is, trade deficits don’t always mean what Trump says they do.

Not necessarily. A trade deficit can mean a country’s consumers are prosperous enough to buy a lot of imported goods. China and other countries with a surplus own lots of dollars as a result, and they often reinvest those dollars in the U.S. When the economy is growing, employment is increasing and consumption is booming -- in other words, when all is well -- the U.S. trade deficit generally grows. In such times, the dollar is generally stronger against other currencies, which also pushes the trade deficit up. Seven years after the U.S. signed Nafta, the trade deficit hit a record high, yet unemployment had fallen to 3.8 percent -- the lowest point in three decades. But when the economy is contracting, the trade deficit usually shrinks, as it did during the 2008-2009 recession.