What's so bad about a trade deficit?

0:01NPR.

0:11This is The Indicator from Planet Money. I'm Waylon Wong. And I'm Darren Woods. And I'm Adrian Ma. At the core of President Trump's earth-shaking tariffs is a belief that countries should not sell stuff to the U.S. without buying more stuff in return. In other words, Trump hates that the U.S. has trade deficits. Yeah. For the big tariff announcement last week, the administration actually used the U.S. trade deficits with each country to figure out the size of their new tariffs. And when we talk about the trade deficit, it might conjure up images of closing car factories and American workers losing their jobs.

0:49But the reality is more complex. In fact, the trade deficit on its own isn't necessarily the boogeyman that Trump claims. Today on the show, why the trade deficit is neither good nor bad.

1:07This message comes from NPR sponsor, Capella University. Learning doesn't have to get in the way of life. With Capella's game-changing FlexPath learning format, you can set your own deadlines and learn on your own schedule. That means you don't have to put your life on hold to earn your degree. Instead, enjoy learning your way and pursue your educational and career goals without missing a beat. A Different Future is Closer Than You Think with Capella University. Learn more at capella.edu. Support for this podcast and the following message come from Recorded Future. Every day, millions of cyber threats compete for attention, but only a few truly matter to your business.

1:50As a leading threat intelligence company, Recorded Future cuts through the noise with precision intelligence. That's why top banks and governments trust them, because security leaders don't just react. They foresee spotting the signals that others miss and acting before threats become setbacks. Recorded future. Know what matters. Act first. Today, we're going to talk about three reasons why we shouldn't worry so much about the trade deficit. First up, Adrian Ma, take us away. So for Trump, any trade deficit that the U.S. has with another country is a problem. His big tariff policy announcement last week essentially aims to eliminate trade deficits.

2:30But let's just do a quick thought exercise, right? If you're listening to this show, I would bet that you're the kind of person that eats food. Am I right? How did you know? Bullseye. Lucky guess. And if you are a person who eats food, I am guessing that you get that food from your local grocery store. Oh, is it true? Oh, yes. Also an inveterate coupon clipper here. I'm on a roll. I must be psychic, guys. So, month after month, year after year, you are buying thousands of dollars worth of groceries from your local grocery store. But at the same time, they never buy anything from you. They don't want my podcasts.

3:07How very dare they. And you could say what you have here is a large and growing trade deficit with your grocery store. And you don't really get bent out of shape about it because, well, you're giving them something they want, money, in exchange for something you want, food. So you can extend this logic to trade between countries. If the U.S. buys more from another country than it buys from us, that is not inherently bad. Partly, it's just a reflection of what U.S. consumers want to buy from other countries. whether it's, you know, cheap clothes or cars from South Korea. Also, there are a lot of products we can pretty much only get from other countries like cocoa beans or potash fertilizer or rare earth minerals.

3:55So in short, trade deficit's not inherently bad. And just one more piece of context to add here. The U.S. does have a negative trade deficit with, you know, the world. It buys more than it sells to other countries. But the Trump administration, in calculating its tariffs on other countries, is really focused solely on the trade in goods. But the fact is that a lot of what the U.S. exports to other countries is actually services, right? We're talking about financial and business services and tourism. These kinds of things make up about 70 percent of the U.S. economy. And when it comes to exporting these to other countries, the U.S.

4:35actually has a pretty sizable surplus. Which again is neither inherently good nor bad. Okay, so that's the trade deficit from country to country. Waylon, what can you tell us about the overall trade deficit and kind of how we should think about it? Right. So as we've been talking about right now, the debate over the trade deficit kind of boils down international trade to like a big global shopping mall where countries are buying and selling physical goods. And this view of trade neglects a huge way that money flows between the U.S. and other nations, and that is investment. Other countries buy a ton of American financial assets.

5:15They buy stocks and real estate and U.S. treasury bonds. And, you know, treasury bonds, as a little reminder, these are essentially IOUs issued by the federal government. American investors buy most of these IOUs. However, foreign investors own over$8 trillion worth of treasuries. Right, because the U.S. has historically been this very safe and reliable place to invest. And the U.S. dollar is also the currency of choice for doing business around the world. Because people, investors, expect the U.S. government will pay its debts on time. And that's why they keep buying U.S. treasuries. And this brings us to the question of, OK, are these investment flows good or bad?

5:54And here is the situation. The U.S. really does depend on this borrowed money for investment. This financing also allows the U.S. to buy more stuff than we sell to other countries. So the flip side of a deficit in goods is a surplus in investment. Yes, this shows up in all of your kind of economics 101 textbooks. A lot of economists say this is where the trade deficit comes from. So trying to reduce the trade deficit could mean losing those foreign investment dollars the economy has come to rely on. Funny enough, like surplus in investment sounds a lot more positive than deficit in trade. So it's like one of those optical illusions where it's either a rabbit or an elderly woman.

6:34It's like, is it a young woman or an old woman? The choice is not rabbit woman. Okay, so we'll set the optical illusion confusion aside for now. And Darian, can you tell us about jobs? Yeah, I want to talk about jobs and the trade deficit. So this is what the Trump administration says this whole set of policies is about. Right. Some people might picture emptying factory towns where the reason given is often competition with China. Yeah. One study in the Journal of Labor Economics finds that competition from China did reduce jobs in U.S. manufacturing in the early 2000s. American manufacturing jobs slid down in the 1980s and really took a dive in the early 2000s.

7:17Now, not all of this was caused by trade. Automation and productivity improvements was perhaps the biggest reason. But for almost all of this time, the U.S. did have a trade deficit with the world. And of course, correlation does not equal causation. But you look at all these factors and it does raise some questions, right? For sure. And so the question is, if the U.S. had a trade surplus, would we have been able to have more jobs? And the answer is, don't pin your hopes on it. There are some economists who believe that trade deficits have worsened job losses in manufacturing. But turning around that trade deficit wouldn't have helped jobs overall much.

7:57We can look at other countries that have had trade surpluses, Germany, Italy, Japan, and they've also had similar drops in manufacturing employment over the same period. And you could argue that they would have been worse without that trade surplus, but it's not as simple as just switching off the U.S. trade deficit. Yeah, you can't just say we're taking it down to zero. The second thing to keep in mind is manufacturing workers as a share of the overall U.S. economy. It's really small. So roughly three and a half million factory jobs were lost due to international trade in the 1990s through to the 2010s.

8:34And that is extremely painful for those workers and their families. But at the same time, the U.S. economy grew 40 million jobs overall across all industries. So we're talking about like a 10x increase. Even more than 10 times. And the big promise of trade is that it helps countries specialize in what they're comparatively more efficient at. For the U.S., maybe it's not steel mills, but instead things like tourism, AI development, higher education, marketing, entertainment. You know, a lot of the service jobs you mentioned, Adrian. Now, this is little comfort for somebody laid off in a company town, and it highlights the real trade-offs that policymakers face and the decisions they need to make about helping laid-off workers.

9:19So we've covered three perspectives on why trade deficits are not inherently a bad thing. But we should also add one caveat here, which is that the U.S. trade deficit may not be a problem on its own, but could reflect issues elsewhere in the economy. So, for example, the U.S. trade deficit is in large part driven by the government's deficit, which is to say the government borrowing more money than it actually takes in in taxes. And the mainstream view of economists is while the government's deficit isn't in a crisis right now, it should definitely be addressed in coming years.

9:58This episode was produced by Julia Ritchie with engineering by Kweisi Lee. It was fact-checked by Sierra Juarez. Cake and Cannon is our show's editor and The Indicator is a production of NPR.