Do trade deficits matter?
Looking at the data, the questions of why the U.S. runs such a large trade deficit with so many countries and whether trade deficits matter likely come up. The answers to those questions are subject to debate, but there are some big-picture explanations.
The United States runs a large, consistent trade deficit because of its relatively high rate of domestic consumption, its low savings rate, and the strength of the U.S. dollar. Other factors, like high labor costs in the U.S. relative to the rest of the world and U.S. consumers spending more than those in other countries, also contribute.
In short, the United States spends more than it makes, and a lot of that spending necessarily ends up on foreign products.
Some argue that the United States should raise its tariffs on foreign goods to balance the trade deficit.
Whether the trade deficit matters depends on who you ask. Some argue that trade deficits are proof of unfair foreign trade practices that have harmed U.S. workers and businesses. Others point to the trade deficit as contributing to the overall U.S. debt, which they say could weaken the economy over the long term.
Not all economists think the trade deficit matters, however. Those on this side of the debate say the trade deficit is a function of a strong economy in which consumers spend more and foreign investors park their cash. Running a trade surplus, they claim, would weaken the U.S. dollar, which could remove the United States as the anchor and engine of the global economy and weaken it geopolitically as well.
Others point out that much of the debate over the trade deficit focuses on trade in goods but not services, which play a much larger role in the U.S. economy. In fact, the U.S. has a trade-in-services surplus with many countries.
The bottom line is that there are downsides to the trade deficit, like the loss of jobs in some sectors and contribution to the national debt -- but there are upsides as well in the form of cheaper foreign goods, foreign investment, and maintaining the dollar as the global reserve currency. The key question, then, is how to manage that balance.
