By Michael Klein, Fletcher School, Tufts University
The issue of international trade and its implications for the United States economy has been the subject of heated debate, particularly under the Trump administration.
Claims have been made that international trade is fraught with unfair dealings, with arguments centered around the concept of bilateral trade deficits.
The U.S. has maintained a trade deficit, meaning its total value of imports has exceeded exports, every year since 1975.
This has prompted assertions from various quarters that this ongoing trade imbalance indicates that the U.S. is being ‘ripped off’ by its trading partners.
President Trump, in an executive order, claimed that these persistent trade deficits pose a significant threat to national security as well as the economy of the United States.
However, a deeper analysis is necessary to unpack what these bilateral trade deficits and the overall trade deficit truly signify regarding U.S. trading relations and economic health.
Over the past five decades, international trade has emerged as a crucial component of the U.S. economy, with both exports and imports more than doubling since 1975.
This reflects the increasing globalization of the world economy, which has seen world trade relative to world GDP rise from 26 percent in 1970 to 63 percent in 2022.
Research shows that there is a high correlation, exceeding 90 percent, between U.S. exports and imports.
Typically, when U.S. exports to the rest of the world decrease, U.S. imports tend to follow suit, especially evident during economic downturns such as the global financial crisis of 2008 – 2009 and the COVID-19 pandemic in 2020.
It is important to note that having a bilateral trade deficit with certain partners does not inherently indicate economic weakness.
An example provided by economist Robert Solow illustrates this point: he has a chronic trade deficit with his barber, who purchases nothing from him, yet this does not mean he is being exploited.
At the same time, Solow enjoys a trade surplus with his students, who derive immense benefit from learning from a Nobel Laureate.
This analogy can be applied to countries as well—businesses will typically export goods and services that they can produce either more cheaply or of a higher quality compared to their foreign competitors.
The United States excels in exporting manufactured goods—such as airplanes, fuel, mining products, and various agricultural commodities.
Conversely, many of the clothes and footwear purchased by Americans come from foreign suppliers that can produce them at lower costs.
It is also crucial to recognize that international trade encompasses services, as well as goods, a consideration often overlooked in discussions surrounding tariffs, where only goods trade imbalances are considered.
In terms of services, the United States stands as the leading exporter, boasting a trade surplus in services amounting to $295 billion in 2024, contrasted with a hefty trade deficit in goods of $1,213 billion.
Furthermore, bilateral trade statistics can often mislead as they record exports to the country that initially receives the goods and not necessarily to the ultimate destination of those goods.
For example, the U.S. has reported large trade surpluses with the Netherlands because goods exported to the Netherlands are often then transported to third countries.
Moreover, the global integration of supply chains muddles the clarity of bilateral trade measures.
Trade statistics tend to account for the wholesale price of a final product from a country without acknowledging that many components of that product may originate from various other countries.
An illustrative case is the entire value of an iPhone assembled in China; it is recorded as an import from China despite significant input from U.S. design, software, and project management, among others.
In a world characterized by extensive international supply chains, this can lead to significant misrepresentations in the origin of exports.
Research suggests that in 2004, the reported bilateral trade deficit with China based on gross value was 40 percent larger than the deficit computed based on the value added by Chinese companies.
Conversely, trade data reveals that the U.S. bilateral trade deficit with Japan based on value added was around 40 percent larger than the recorded trade deficit, signifying Japan’s role as a net exporter of production inputs.
Despite the complications with bilateral trade data, aggregate trade statistics remain reliable since everything must originate from some source, ensuring that overestimations and underestimations ultimately balance out.
It’s significant to note that an aggregate trade deficit does not in itself signify economic weakness.
Gross Domestic Product (GDP), which measures national income, accounts for household consumption, business investments, government spending, and net exports.
While imports negatively factor into these calculations, it does not suggest that they deduct from economic strength.
In fact, historical data shows that stronger GDP growth can sometimes coincide with increasing trade deficits.
For example, during the Reagan boom from 1981 to 1985, tax reductions and heightened defense spending stimulated GDP growth, which ultimately led to increased consumption—including of imports—and investment.
This surge in consumption was also influenced by U.S. interest rates rising, drawing foreign capital inflows that further inflated the dollar, thus making imports cheaper while concurrently rendering U.S. exports more expensive.
Alternative scenarios could also lead to stronger GDP growth occurring alongside shrinking trade deficits; for instance, if enhanced growth overseas facilitates higher exports from the U.S., leading to a reduced trade deficit while fostering national economic growth.
These examples reinforce the notion that a consistent theoretical correlation between trade deficits and GDP growth does not exist.
Indeed, the correlation between net exports relative to GDP and GDP growth over the past fifty years is essentially nonexistent, recorded at a mere -0.6 percent.
Over the long haul, persistent trade deficits seem to reflect enduring economic conditions contributing to heightened levels of imports relative to exports.
A nation with a sustained trade deficit continually spends more than it earns, akin to a household that overspends their income.
This situation necessitates borrowing from abroad to finance the excess spending.
It can lead to either a larger or more productive economy in the long term if these expenditures are allocated towards substantial investments.
Furthermore, it’s worth noting that manufacturing employment has waned across advanced economies over the last twenty years, regardless of their trade balance status.
The Trump administration has contended that trade deficits lead to manufacturing employment decline, yet the trend in fact extends to all advanced economies, even those with persistent trade surpluses like Germany who have seen a nearly 35 percent drop in production industry employment.
Automation serves as a key factor in this trend, indicating fewer workers are necessary to achieve a certain level of manufacturing output.
That said, certain sectors have indeed suffered adverse effects from trade competition, especially within manufacturing-dependent communities.
Research indicates that the swift rise in trade with China has had detrimental impacts on specific local economies, especially in areas with already declining industries, higher wage scales, or lower education levels.
To summarize, while some countries might implement protectionist measures or industry subsidies that confer advantages to domestic sectors, the existence of bilateral trade deficits alone does not substantiate those claims.
In fact, these measures can provide an increasingly unreliable narrative in the context of inherently globalized production.
Workers facing substantial international competition can undoubtedly be adversely affected by trade, highlighting the need for appropriate safety net policies.
However, the expanding role of trade in both the U.S. and global economies means that disruptions—whether from trade changes or global supply chain issues—can have significant economic repercussions.
Ultimately, both trade deficits and macroeconomic growth stem from more fundamental drivers, with no systematic relationship linking larger trade deficits to a slowdown in economic growth.
image source from：https://econofact.org/does-international-trade-hurt-the-united-states
