I have very little to basic knowledge on economics. But I’m very confused why it’s being said that the America trade deficit is a bad thing.
From my very limited understanding, the majority of American output is technology and services. That’s hard to measure against manufactured goods. So is a manufactured goods deficit really the proper measurement of the US economy’s stability and future?
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When you go to the grocery store, you don’t expect to make a profit while you’re there. The grocery store isn’t your employee.
The idea that a country need to have a balanced trade is like expecting to sell something of equal value to your grocer when you go there.
Why is it bad? It isn’t, but schmucks don’t understand economics, so it’s something to complain about.
I read this somewhere today so I try to rephrase it accordingly:
imagine you have a dog. the dog needs to be walked regularly. you are a well-paid consultant with a proper hourly rate.
you hire a college student to walk your doggo for 20 bucks an hour, so you can focus on work for which you charge 300 bucks per hour. every 20 dollars you pay that student is an hour you can work in peace and earn 300 dollars.
you now have a 100% trade deficit with that college student, you buy his service and he buys no service from you.
do you think that trade deficit is a bad thing, and you should walk the dog yourself, sacrificing those 5 * 300 dollars each week to save the 5 * 20 dollars?
It’s not a bad thing. It may look bad if you look at in isolation (i.e. bilateral deficit), where it might look like America is spending more money to buy things from overseas. This view is so simplified and inaccurate that it’s left economists baffled on how the Trump administration came up with the formula to tariff other countries in order to reduce the trade deficit.
The simple way to approach this is to look at what you “trade” every day. You get paid from your work. You are therefore in a trade surplus with your employer because they give you money. You then go McDonalds to buy a cheeseburger. You are now in a trade deficit with McDonalds. McDonalds is not going to pay you back any money, so you will always be in a trade deficit.
The huge misunderstanding that Trump appears to be pushing is a “tit-for-tat” scenario where a country has to buy more goods from the US (or sell less), which doesn’t make sense. Again, it’s like expecting McDonalds to buy from you or not sell food to you. You (as in, the American people) want specific goods or services from other countries, whether it’s coffee beans or consumer electronics, and that’s fine because you’re getting money from elsewhere to pay for that, just as you would as an individual who earns money and spends it on stuff you want.
Not even a little. Is it nice to have a trade surplus? Sure, especially if you’re a small country, because it means you’re selling a lot of stuff to other people and you have goods that are in demand. But when you’re a high population country and you don’t have all the resources you need and you have a complex technological economy that requires a lot of both raw goods and parts for things but you don’t have means to produce all of it yourself affordably for your economy, then it’s totally ok to have a trade deficit. Makes no difference to the overall strength of the economy.
In fact, about the only time the US has had a trade surplus was during the Great Depression, so let that guide your understanding.
It just means we buy more goods from a country than we sell. Which makes sense because the US is a tech economy. We haven’t been a manufacturing country in over 50 years.
Conservatives just seem to think it’s the 60’s and 70’s again
It certainly is a part of the whole “economic health” story, but it’s definitely not the only part.
The USA imports much more goods than it exports. So we’re sending more money to other countries than those countries are sending to us. All by itself, this sounds like we’re making other countries wealthier while our country gets poorer.
But goods isn’t the only thing that an economy is judged by. The USA’s economy is driven by ideas, by innovation, by technology. We develop computer software and movies and new ideas for the next service business.
Americans buy so many imported goods because we can. The US dollar is one of the strongest currencies in the world. We can afford cars and phones and foods and all sorts of products because we’re one of the richest nations in the world. In a way, the trade deficit is directly due to our ability to afford all those products. That’s a sign of a strong economy, not a weak one.
We do need more manufacturing in the USA. Trade tariffs are meant to protect domestic manufacturing by making imported goods more expensive so consumers buy stuff made in America. But for that to work, tariffs have to be applied carefully, on the specific products where American manufacturers are struggling to compete. That is completely NOT the way the tariffs announced this week were applied. They’re going to hurt many manufacturing industries in the USA far more than they help because they will increase the cost of raw imported goods that are required to manufacture products as well as increase inflation so much that American consumers can’t afford any products because they’re spending so much on bare necessities.
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Harry Truman once joked he needed a one handed economists, because his economists were always saying “but on the other hand”.
On the one hand: A trade deficit is often seen as a sign of economic strength. When a country imports more than it exports, it typically means that it has a high demand for foreign goods and services, signaling a strong consumer base and a prosperous economy. It can also reflect a strong currency, as people have more buying power to purchase goods from abroad. In the short term, a trade deficit can also help keep inflation in check because it means lower-cost imports, which benefits consumers and businesses relying on those goods.
On the other hand: A persistent trade deficit can indicate underlying economic imbalances. It may suggest that a country is consuming more than it produces, leading to greater reliance on foreign debt to finance that consumption. If the deficit is funded through borrowing, it can create future repayment obligations that place a strain on the economy. Moreover, a prolonged trade deficit may result in the loss of domestic industries to foreign competition, potentially hurting long-term economic stability and employment. There’s also the risk that a trade deficit can lead to a weaker currency over time, as foreign buyers may demand higher returns for holding that country’s debt or currency.
So, a trade deficit isn’t inherently bad (see the other comments) but there are reasons why you might want to address a trade deficit. What matters is the nature of what is being imported and exported, so there’s a lot of nuance there (which is completely lacking in our policy right now).
Generally an economy wants to move upward. Consider making tables. There are various stages to that – there is cutting down the tree, there is processing it into lumber, there is turning the lumber into a table, and there is the person who designed the table. Normally, an economy will start at the cutting down the tree because it’s very easy to do, but it doesn’t bring a high standard of living to the person doing it because the cut tree doesn’t have a lot of value on its own. And it’s hard and dangerous work. Processing the tree into lumber is a better job that will pay better because it’s harder to do and yields something more valuable. Making the table is better yet. And designing the table better yet. Assuming a fixed number of workers, you want to trade out the lower level jobs for the higher level ones whenever you can. That raises standards of living. And the US has done a LOT of that. We are 4% of the global population but 25% of the global economy. Our workers are extraordinarily productive. But that means we don’t cut down a lot of trees, and we do design a lot of tables. So, where do we get the trees from? We import them. We have workers in other countries do that work, even when we have a lot of trees. And if the workers in those countries can’t afford the tables we design and make, you’re going to have a trade deficit – we need their trees, they can’t afford our tables. That’s a perfectly good trade deficit to have. It means we are steadily raising the standard of living in that other country due to a flow of money to that other country, but we are getting what we need in return. The idea that could be fully reciprocal is naive at best.
You don’t want a trade deficit the other way though, where a country is making high end goods and you are buying them not because you lack that capability, but because the other country is kind of cheating at it. This is one of the main complaints about China where the government can subsidize the production of a lot of goods that the US could also make, but not at that low of a price because we believe (sorta) that we shouldn’t take taxpayer money and just hand it to GM to make cheap cars (we do that, just on a lesser scale). That’s the kind of trade deficit you want to eliminate, and putting a tariff equal to the subsidy provided by the foreign government evens that out.
Note, that’s not what we’re doing. People are upset because nobody can figure out the point of the tariffs. They are being sold with contradictory ideas like they will shift manufacturing to the US and they will raise revenues for the government. These are contradictory, if you do one, you necessarily fail at the other.
Many economists dislike this plan because if the goal is to reduce the import of lumber, then someone needs to go out and cut down trees, and unless you are rapidly expanding immigration in order to fill that job, you’re asking someone in a better job – like designing the table, or making the table, to forgo their better job (because demand has gone down due to the tariff raising prices) to go out and cut trees instead. And that’s going to be insanely unpopular, and certain to fail.
Probably worth reading this post from a few months ago
https://www.reddit.com/r/AskEconomics/s/jdpu3Njqs7
But tldr, it isn’t bad – the administration is just using it to paint a negative picture and people are buying into it because they are blindly invested in to what trump says.
There are unprovable underlying reasons he is doing this and it’s likely to create market turmoil on purpose
because his investing partners are now cashing in on ‘puts’ right now (selling borrowed assets at a higher price, predicting values will go down, and rebuying at the lower to return the borrow)
then later they will buy calls, when the stock starts to gain value again (buy the stock at its now lower price, hold it, sell it when it’s gained value)
It’s all very crooked and not in any developed countries interest, yet he is doing it anyway.
Not to mention the ‘lets make everything in the country and sell to ourselves’ idea only benefits the already rich, because having nice things, for cheap, relies on broadly taking advantage of other people’s low labour pay – there is absolutely no way Americans can make temu style goods themselves, or good TVs, or full cars and be paid a fair wage, and buy these goods, and be richer than they are now
You and your friend have business .
You don’t have clients but you have each other to make money.
He buys 100$ with of good from you
You buy 200$ worth of good from him everyday
Who is making money?
And who is in deficit ?
Why is it bad to be in deficit in trade? You’re both selling . He is your regular client .
Trade deficit includes tech and services.
It’s bad because the country you’re in deficit to ends up owning more and more of your money, your assets, your country.
They aren’t. Trade deficits are not a negative thing if you know what they are. But if you’re an idiot like our circus peanut in Chief you think there’s some sort of rip off or moral judgment.
Money flows in circles. You will never be in a relationship with anybody where nobody has a trade deficit.
Every time you go to the store and buy groceries you are having a personal trade deficit with the grocery store. They’re getting your money and you’re getting there goods. That’s what a trade deficit is. That’s all it is.
The grocery store is going to spend that money in various places. And eventually in the cycle they’re probably going to buy something that helps my employer pay my salary.
We love our trade deficits because we like to buy stuff from people who can’t afford to buy our stuff. We sell our stuff to people who can’t afford to buy our stuff. But it’s all part of the circle of life.
If you were required to figure out a way to directly sell something to the grocery store in order to match your trade deficit and bring it into balance we would all be hard-pressed to dine. Because the grocery store just doesn’t need all the crap we personally might have to sell them collectively.
Trade deficit is a foolish simple metric used to explain the leading edge of complicated issues to the uneducated. And our president is woefully under educated, and he has chosen advisors who either are equally uneducated in their fields or are completely off topic or are completely willing to tell him what he wants to hear instead of the truth.
It is a ridiculous and economy ruining thing to try to have a perfectly balanced trade relationship with a single partner. It destroys your options and turns you into basically a dependent state.
So what’s wrong with the trade deficits at the moment is that the giant child in Chief feels very sad about hearing the big numbers that aren’t flowing in his direction.
So they sound bad to him because he doesn’t know how to profit from them.
It depends on the reasons for the trade deficit. If there’s a trade deficit because the country you’re trading with is so poor it can’t afford to buy what you export, it’s not bad. You’re helping out that country to feed itself while your citizens get cheaper stuff. The jobs you’re losing are jobs your people don’t want because they don’t pay enough. If the job doesn’t even pay what would be minimum wage in your country, that’s an industry you don’t want. They can have it.
However, if there’s a trade deficit because the other country is manipulating its currency and subsidizing its industries that’s bad because the citizens of the other country are being kept intentionally poor by its own government with the intention of wiping out your industry. That’s bad.
The problem with the tariffs is not that they exist. We have always had tariffs. The problem is they are massive and they are haphazard with no reason or strategy. They are arbitrarily applied to every country. They exist for the purpose of the president selectively giving exemptions to companies that pay him bribe money or give in to his controlling demands. They are not designed to fix any trade imbalance.
It being bad relates to an old economic theory that no longer applies in the modern world.
I walk into a grocery store and spend $20 on food.
I now have a $20 trade deficit with that grocery store. However, i also have $20 worth of food that i didn’t have before.
Congratulations, you now know more about economics and international trade relations than Donald Trump.
Yes, the POTUS has a level of understanding of this subject matter that would have seen him fail a 9th grade introductory economics class.
Trade deficits are not a bad thing. You’re starting from a flawed premise. Trade deficits are a result of you getting stuff in exchange for money – money, which, by the way, is just a claim against you for stuff later, that nobody is taking you up on.
If you’re running a trade surplus, what’s happening is that you are sending your population’s labor and your country’s resources, overseas. You’re becoming poorer. You’re sending all your wealth away.
Money is just tokens. Money is not wealth. Wealth is in the built environment and the technology we use every day.
If you buy raw materials from country A, and use them to make a product which you sell to country B, then you have a trade deficit with country A, and a trade surplus with country B.
There’s nothing wrong with the above arrangement. Nobody is doing anything inherently wrong. Putting a tariff on goods from country A will hurt your trade with them and with country B by making your export goods more expensive.
The idea (and this is wrong, I’ll get to it) is that every time you sell something, money comes in, and every time you buy, money goes out. Money means jobs, money means food, money means prosperity. Trade deficit? You’re losing money, you’re losing jobs, you’re giving your wealth away.
The catch is that that’s only true if everyone is equally good at everything, which is wrong. I make $200/hr programming computers but I’m also a pretty good cook. If I only care about money, should I work two fewer hours and lose out of $400 of wages to avoid spending $50 on restaurant meals when I’m craving a nice chicken cordon bleu? Obviously not, even though it puts me at a “trade deficit” with the restaurant.
The trade deficit itself isn’t bad. It’s why Trump is utilizing tariffs that are bad. It’s designed to tank the economy. What happens afterwards is a two step process.
Like Russia when Putin came into power and wanted to stay in power forever, he also tanked the economy. He then had all his loyalists get top positions in government even if they had zero experience to helm such a project. All those loyal got first dibs on buying back companies, entities, contracts, etc, pennies on the dollar.
This enforces companies, sectors, schools, law firms, et all, to bend to knee to Trump. You want reprieve? Publicly, submit loyalty to me and tell the public how much you believe in my decisions. Hold your employees accountable who don’t hold my values. We are already seeing this part in action now. Universities are having funds withheld because there was a protest on their campus. Some schools have already turned over students who are protesting and are here on a student visa. The law firm that Doug Emhoff is a partner at? They had to remove all DEI advancements in their firm, and agree to do $100 million worth of free work to the government. Aka Trump.
Looking at the economy or trade wars or anything else is precisely what they want. Distract you from seeing exactly what’s going on.
Do you know why our forefathers put in place that the President cannot do precisely the shit Trump is doing right now? Because they learned from the British monarchy back in the day. They saw what happened when Kings and Queens had unchecked power to do as they pleased with ones spending and taxation. In the past, when citizens were with the king or the kings decisions, to punish dissent, the King would, raise taxes.
British revolution started basically because a king levied heavy taxes on his constituents. It was basically, stfu and the taxes will come down. What did the citizens want? Self governance lol.
The steelman argument for trade deficits being bad is that, in a completely ideal world, you would prefer to buy something for $100 from your neighbor rather than $100 from someone on the other side of the world, for the simple fact that your neighbor will most likely pay taxes (which is a net positive for you) and also will spend that within the community (again a net positive for you). The person over seas will likely pay taxes to their own government, and spend the profits to grow their own community. On top of that, each time you buy something from China, you are essentially giving a Chinese person USD. If they don’t want USD, they will need to sell this in exchange for their local currency, which can devalue the USD
All that being said, the other option is that we manufacture everything here and end up paying like triple the price for it all
It isnt necessarily bad. Do you buy things from the grocery store? Do they buy anything from you?
Imagine being mad at the grocery store for not buying anything from you. That is what is happening here.
It’s not bad, any more than paying the grocery store for milk is bad. It’s not like you have to force the grocery store to buy something from you in return.
Its not “A trade deficit is bad” it’s “Our (US) trade deficit is bad”
Claims that boil down to “we are the largest consumers, so it makes sense for us to be in a trade deficit” or any of these analogies you are seeing is insufficient at answering why the US trade deficit is bad; it’s just simply not answering the question. If it was a sufficient answer, then it is a suitable answer if we were in a trade deficit of $1 usd or $50 trillion usd. Clearly, the numerical value or range of values is important at deciding whether our deficit is good, bad, or fair.
You have to view international trade not in isolation with another country, but as a web of all countries trading with each other. It’s the reality of it, and there are too many things to consider to get an accurate representation. Once viewing that, you will realize it is nearly impossible to determine how fair our trade is (perhaps if analyzing international trade of the entire world is your full-time profession). It’s just unrealistic to settle on an honest opinion. So, you have to look through different means at what may cause our trade deficit and by how much. One way is to look at tariffs keenly.
At first glance on tariffs, US tariffs appear fair in relation to their trading partners. However, once you look at the most traded goods between the US and their trading partners, look for the average applied tariff rates of those specific goods, you will find it is not fair.
Trade deficits with individual countries aren’t bad. They just indicate that those countries have good stuff for sale that your citizens want to buy.
Having a trade deficit overall is arguably bad, it indicates that you aren’t making stuff that other people want to buy, at least not as much as you are buying other people’s stuff.
If money is exiting the country, what’s the plan on how to get it back?
It’s not good or bad, simply neutral.
I have a trade deficit with my local grocery store, I buy lots from them and they don’t buy anything from me.
Is that a problem? No.
As long as I have the income from my job which sells to other businesses, it all balances out. Everybody is happy, and gets the stuff they want to buy.
The same principles apply to trade between countries.