Photo: Official White House Photo/Joyce N. Boghosian
One of President Trump’s most consistent complaints is about America’s trade deficits.
In April 2025, when announcing his “Liberation Day” tariffs, Trump called trade deficits a “national emergency”. This reignited America’s trade war, now waged on a country-by-country basis against even America’s allies.
But what are trade deficits? And are they actually that bad?
A trade deficit simply means a country buys more from another country than it sells to them – or, to put it another way, imports are larger than exports. For a household or a business, it is common sense that deficits are bad, because if you keep spending more than you’re making you’ll go broke. Having gone bankrupt a few times, Trump the businessman would know this.
Trade isn’t the only way money flows in or out of a country. Payments to debtors and investors across the border also affect the balance of money flow – or current accounts – between countries.
It is also important to distinguish between country’s bilateral deficit (with one particular country) and its overall trade deficit (with all countries). To obsess over the balance in one bilateral trade relationship is like obsessing over having a “trade deficit” with your local supermarket. As its customer, you are only going to have a “trade deficit” with it, you give it money, it gives you goods and services. That doesn’t mean the shop is ripping you off.
For example, China buys a lot of iron ore and natural gas from Australia because it needs them for China’s industry. But Australia buys fewer Chinese products because it does not need as many of them, so China has a $110 billion trade deficit with Australia annually. But Beijing doesn’t accuse Australia of ripping China off, and Beijing is not worried about a trade deficit with Australia, partly because it runs big trade surpluses elsewhere – such as its $400 billion surplus with America in 2024.
America does have a big overall trade deficit. Compared to other major world economies, America’s deficit stands out both in its size and in its persistence. But this is not the “national emergency” Trump says makes it out to be. First, because America no longer offers to convert the US dollar for gold or fix its exchange rate with other currencies, America cannot “run out of money”. If there is too much of US dollar sloshing around, the currency would simply depreciate.
The US dollar is also the world’s dominate currency, used more than anything else in international transactions. Other governments, businesses and citizens continue to want the US dollar, and seem content to keep accepting it while sending real “stuff” to America. Economists disagree why the US has persistent trade and current account deficits, but few would call it a national emergency.
Trump wants to “solve” America’s trade deficit by bringing manufacturing back to American shores. But when America’s unemployment is relatively low (as is today), doing more of one thing means doing less of others. For instance, more Americans making steel or assembling iPhones means fewer of them building Boeing jets, developing world-leading software, or researching pharmaceuticals. But, as a rich country, America’s competitive advantage is these latter areas.
The same principle applies to investment—the new machinery and buildings devoted to things like steel-making would not be used for the more high-tech industries. In other words, “solving” the trade deficit this way means reallocating resources from more to less productive sectors. This may not make Americans better off overall.
What is it about “tariffs” that led Trump to call it the most beautiful word in the English language? He seems to think that by taxing imports heavily, Americans will buy less from abroad and more at home, which will stimulate the domestic economy.
However, the tariffs will raise costs for American producers (including exporters) by making the imported goods they need to buy for the things they produce (like component parts) more expensive. In turn, exports from America could become less competitive. This hurts exports over the long run, making it harder to offset the trade deficit.
Trump’s tariffs will hurt lower-income households the most. This is because they spend more of their income on ordinary imported consumer goods compared to richer households.
Persistent trade deficits could be a problem, but not quite in the ways President Trump thinks about them. And his solutions are more likely to hurt ordinary Americans than they are to help.
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