July 30, 2018 3:16PM

There’s No Such Thing as a Trade Deficit

Concerned with how trade is commonly discussed, Greg Mankiw recently issued a plea to journalists to halt the use of subjective terms to describe trade flows. Rather than words such as “deteriorated” or “improved,” the Harvard economics professor (and noted textbook author) proposes that writers employ more objective language such as “the trade balance moved towards surplus.”

Mankiw’s plea is fine as far as it goes, but it probably doesn’t go far enough. The problem in the way trade is discussed lies not only in the descriptions applied, but the nouns themselves.

To speak of trade surpluses or deficits is utterly nonsensical, or at the very least a corruption of the term “trade” that incorrectly uses it as a synonym for “exports.” Trade, however, comprises both selling and buying, both exports and imports. The amount of trade between two countries (or any other group of entities) is the sum of their exports and imports. Given that both sides engage in the same amount of bilateral trade—that is to say, the same total of exporting and importing—a trade deficit is a mythical beast and logical impossibility. Perhaps we can speak of net exports or net imports, or export deficits and import surpluses as well as their reverse, but “trade deficit” should be regarded as a term devoid of real meaning.

Talk of a trade balance either being in surplus or deficit is problematic for similar reasons. Occasionally, one may encounter the descriptor “positive” applied to the trade balance if exports exceed imports and “negative” if the opposite occurs. But—as with trade deficits and surpluses—this is completely arbitrary. It makes no more sense to say this than to characterize a surplus of imports as positive or exports exceeding imports as negative.

This is no exercise in pedanticism. Precision of language is important. Terms matter, and the way in which trade is discussed influences how it is perceived. One can’t help but wonder how many people have an irrational fear of imports because they are said to contribute to a “trade deficit” or a “negative trade balance”—terms laden with unfavorable connotations. It’s not difficult to imagine that U.S. trade policy would be on a very different trajectory if President Trump spent his formative years in a world that did not speak of trade deficits and instead used more exact language and terms.

It may be too late for Trump, but a change in terminology could go a long way toward improving the conversation around trade and clearing the path for better policy.

November 12, 2017 1:28PM

Trump’s Unfair Deals?
A Free‐​Trade Parable

As Dan noted, President Trump has been in Asia, making a state visit to China and then meeting with foreign leaders at an Asia-Pacific Economic Cooperation forum in Vietnam. As part of the trip, and perhaps in an effort to recapture his populist mojo amidst cratering job approval numbers back home, he has remounted one of his favorite hobby horses: decrying “unfair trade deals” that he says put America at a disadvantage with its trading partners.

The president does make oblique references to barriers that other countries place on American products entering their markets. But his comments suggest his biggest concern is the large trade deficits the United States has with some countries. According to Trump, those deficits are all the proof necessary that America is being snookered, and that current trade arrangements should be dissolved and renegotiated.

“The United States really has to change its policies because they've gotten so far behind on trade with China and, frankly, with many other countries,” he said in a press conference with President Xi in China. “The current trade imbalance is not acceptable,” he told reporters in Vietnam, adding: “I do not blame China or any other country, of which there are many, for taking advantage of the United States on trade. If their representatives are able to get away with it, they are just doing their jobs. I wish previous administrations in my country saw what was happening and did something about it. They did not, but I will.”

But if a trade deficit—especially a large, persistent one—is proof positive of unfair dealing, then Trump has some things to discuss with U.S. authorities about his own business empire, the Trump Organization.

Consider the tenants in his office, retail, and condo complexes, the lodgers at his hotels, and the players on his golf courses. They spend hundreds of dollars a day and thousands or millions of dollars a year on Trump products. Yet it’s highly doubtful that the Trump Organization simultaneously purchases hundreds of dollars a day or thousands and millions of dollars a year in goods from those same customers. Those customers thus have huge trade deficits with the president and his businesses. By his own logic, the Trump Organization must be treating those customers unfairly.

But wait, the president might protest, that’s not right—his businesses may not buy things from his customers, but the Trump Organization buys things from other businesses, and those businesses buy from other businesses, and sooner or later the money winds its way back to his customers.

But people in foreign countries likewise use American dollars to buy things from other countries, and invest in other countries, and some of that money winds its way back to the United States, too. Besides, even if China were to keep every U.S. dollar it receives and tuck them all away in some giant mattress, that would hardly reduce the number of dollars the United States can spend on domestic goods—after all, we own printing presses! Meanwhile, as all those dollars whirl around or get tucked away, the United States receives more and more Chinese goods—goods that we value more than the dollars we exchange to purchase them.

Unfortunately, the president ascribes to a very simplistic—and wrong—understanding of trade. The next time he launches in on the horrors of U.S. trade deficits, I hope someone asks him if there's also a problem with the imbalanced trade the Trump Organization has with its customers. 

February 21, 2017 3:33PM

Manufacturing GDP and the Trade Deficit Rise and Fall Together

As The Wall Street Journal notes, “Mr. Trump and his advisers see the U.S. goods trade deficit as an indicator of U.S. economic weakness.” 

Manufacturing Output and Goods Trade Deficit

Yes, they do. But why?  As the graph clearly shows, the real gross output of U.S. manufacturing rises when the goods trade deficit (both measured in 2009 dollars) is also rising.  When trade deficits fall, so does U.S. manufacturing.  Sinking industries need fewer imported parts and materials, and their unemployed workers can’t afford imports.

Measured in 2009 dollars, the goods trade deficit fell from $863.4 billion in 2006 to $525.2 billion in 2009.  Peter Navarro, the President’s liberal protectionist trade adviser, would apparently call that good news.  The rest of us called it The Great Recession.

November 22, 2016 3:54PM

The Simple Analytics of Why President‐​Elect Trump’s Policies Will Probably Result in a Trade War with China

The United States has recorded a trade deficit in each year since 1975. This is not surprising. After all, we spend more than we save, and this deficit is financed via a virtually unlimited U.S. line of credit with the rest of the world. In short, foreigners in countries that save more than they spend (read: record trade surpluses) ship the U.S. funds to finance America’s insatiable spending appetites.

Japan and more recently China have been the primary creditors for the savings-deficient U.S. And since their exports are largely manufactured goods, the real counterpart of their buildup of dollar claims on Americans is for them to run export surpluses in manufactured goods with the U.S. The accompanying chart shows the contribution of Japan and China to the U.S. trade deficit since the late 70s.

Percentage Contribution to U.S. Trade Deficit by Country

So, the U.S. savings deficiency has contributed to the hollowing out of American manufacturing. But, you wouldn’t know it by listening to President-elect Trump. He never mentions America’s savings deficiency. Instead, he claims that American manufacturing has been eaten alive by foreigners who use unfair trade practices and manipulate their currencies to artificially weak levels. This is nonsense.

To get a handle on why the President-elect Trump – and many others in Washington, including the newly-elected Senate Minority Leader Charles Schumer – are so misguided and dangerous, let’s take a look at Japan. From the early 1970s until 1995, Japan was America’s economic enemy. The mercantilists in Washington asserted that unfair Japanese trading practices caused the trade deficit and destroyed U.S. manufacturing. Washington also asserted that, if the yen appreciated against the dollar, America’s problems would be solved.

Washington even tried to convince Tokyo that an ever-appreciating yen would be good for Japan. Unfortunately, the Japanese caved into U.S. pressure, and the yen appreciated, moving from 360 to the greenback in 1971 to 80 in 1995. This massive yen appreciation didn’t put a dent in Japan’s exports to the U.S., with Japan contributing more than any other country to the U.S. trade deficit until 2000 (see the accompanying chart).

In April 1995, Secretary of the Treasury Robert Rubin belatedly realized that the yen’s great appreciation was causing the Japanese economy to sink into a deflationary quagmire. In consequence, the U.S. stopped bashing the Japanese government about the value of the yen, and Secretary Rubin began to evoke his now-famous strong-dollar mantra. But while this policy switch was welcomed, it was too late. Even today, Japan continues to suffer from the mess created by the yen’s appreciation.

Now, China is America’s economic enemy, and China bashing is in vogue. Indeed, hardly a day goes by without President-elect Trump railing against China, accusing it of unfair trade practices and currency manipulation. He is also threatening to impose huge tariffs on the Middle Kingdom.

At the same time, President-elect Trump is promising a set of spending and taxing policies that will cause the gap between our spending and savings to widen. This will balloon our trade deficit. And with that, Mr. Trump will, no doubt, point an accusatory finger and start a trade war with China, a country that currently contributes 48% to the U.S. trade deficit. So, the President-elect’s promised lax fiscal policies might just get us into a trade war with one of the most important countries in the world.

August 15, 2016 1:27PM

The Economics of Trade: Wilbur Ross Is Mistaken

Billionaire investor Wilbur Ross, a supporter of Donald Trump, made the following comment in a letter to the Wall Street Journal (Aug 15): “It’s Econ 101 that GDP equals the sum of domestic economic activity plus “net exports,” i.e., exports minus imports.  Therefore, when we run massive and chronic trade deficits, it weakens our economy.”

In reality, the last sentence –beginning with “Therefore”– does not follow from the first.

Mr. Ross is alluding to the demand side of National Income Accounts, wherein Y=C+I+G+ (N-X). That is, National Income (Y) equals spending on Consumption (C) plus Investment (I) plus Government (G) plus Net Exports (Imports N minus Exports X).  

Taking such accounting too literally, a reduction in imports may appear to be mathematically equal to an increase in overall real GDP.  But that is dangerously incorrect, as the 1930s should have taught us.

The accounting is true by definition (a tautology). But economics is about behavior, not accounting identities.

If trade deficits “weaken our economy,” as Mr. Ross asserts, then we should expect to see real GDP slow down when trade deficits get larger and see real GDP speed up when trade deficits get smaller or become surpluses.  What the data show is much different – the exact opposite in fact.  

trade deficits and GDP growth

The graph compares net exports (N-X) as a percentage of GDP with the annual growth of real GDP.  What it clearly shows is that trade deficits fall in recessions and grow larger in periods of strong economic growth. Trade was in surplus during the recession of 1970 and 1975, and the trade deficit shrank to trivial size in the recessions of 1980-82 and 1990-91. Trade deficits were largest in 1983-89 and 1997-2000 when real GDP was growing by 4.4 percent a year. Trade deficits also expanded in 2003-2006, when real GDP was growing by 3.2 percent a year. As real GDP growth slowed to 2 percent from 2011 to 2015, the trade deficit stabilized near 2.9 percent of GDP.

The main reason trade deficits are inversely related economic growth, contrary to elementary accounting, is that U.S. industry needs more imported parts and raw materials when the economy expands, and consumers can afford more imported luxuries when their incomes and investments are rising. A secondary reason is that whenever the United States is growing faster than the economies of major trading partners (such as Japan, EU, Canada), their demand for U.S. exports is likely to lag our demand for their exports.

Does Y=C+I+G+(N-X) imply that raising tariffs to increase the cost of imports to U.S. families and firms will somehow make their real incomes grow faster?  Of course not. Paying more for less would make Americans poorer, not richer.  If the price of widgets went up by 35 percent because of a tariff, fewer widgets would be sold and fewer Americans would be employed making them.

March 30, 2016 4:00PM

Little‐​Known Facts About U.S. Trade With China

Trade with China in Services

William Galston’s

Wall Street Journal column, “Why Trade Critics Are Getting Traction,” asks why U.S. employment in manufacturing fell from 17.2 million in December 2000 to 12.3 million last year.    He suggests that “import penetration from China [not Mexico] has been responsible for up to 20% of U.S. job losses.” But “up to” 20% explains very little, and that figure is at the high end of a range of estimates about 1999-2011 from a working paper by David Autor, David Dorn and Gordon Hanson. They speculate that “had import competition not grown after 1999” then there would have been 10% more U.S. manufacturing jobs in 2011.  In that hypothetical sense, “direct import competition [would] amount to 10 percent of the realized job loss” from 1999 to 2011.  Since 2007, however, the study’s authors find “a marked slowdown in import expansion following the onset of the global financial crisis, which halted trade growth worldwide.”

Deep recession and weak recovery is what slashed manufacturing jobs since 2007, not imports. In reality, imports always fall in recessions.  Although Autor, Dorn and Hanson emphasize imports of consumer goods (clothing and furniture), nearly half of U.S. goods imports (47.7% last year) are industrial supplies and capital goods which are essential inputs into expanding U.S. production.  That is a big reason why imports rise when U.S. industry expands and fall in slumps.

Even if “up to” 20% of manufacturing jobs lost since 2007 could be blamed on imports from China, as Galston claims, that need not mean the overall numbers of U.S. jobs were reduced.  “There is no evidence,” writes Galston, “that increased competition from China has produced offsetting employment increases in other industries whose products are traded internationally [emphasis added].”  Confining overall employment effects to “traded goods,” as Autor, Dorn and Hanson do, arbitrarily excludes services – such as financial and legal services, accounting, advertising, travel, telecom and insurance.   Services account for 32% of U.S. exports, and the U.S. runs a large and growing trade surplus with China ($28 billion in 2014) and with the world ($233 billion). Dollars foreign firms earn by exporting goods to the U.S. are commonly used to import services from the U.S. or to invest in U.S. real and financial assets; both those activities create U.S. jobs. Hollywood, Madison Avenue and Wall Street are big, high-wage U.S. exporters.

Confining the job impact to traded goods also excludes U.S. jobs in transporting, wholesaling and retailing Chinese goods (Walmart, Amazon...), as well as shipping U.S. exports to China and Hong Kong.  Incidentally, the U.S. ran a $30.5 billion trade surplus with Hong Kong last year, which isn’t counted trade with China though it really is.

Galston acknowledges that “rising productivity” [output per worker] is “part of the story” about manufacturing jobs.  In fact, it is essentially the whole story from 1987 to 2007, when U.S. manufacturing output nearly doubled.  The deep recession and slow recovery explain what happened to manufacturing jobs over the past ten years, not foreign trade.  

Index of U.S. Manufacturing Output and Employment

March 18, 2016 6:38PM

Fact Checking the Washington Post’s Fact Checker on Trade and Manufacturing

Pinocchio Quattro!” is Washington Post “Fact Checker” Glenn Kessler’s response to Donald Trump, for his claims about trade, currency manipulation and manufacturing. No doubt the 4-pinocchio distinction is well-earned. Actually, without issuing a score, my analysis in Forbes today reaches similar conclusions.

Reading Kessler’s explanation and justification for the award, I was pleasantly surprised by how well he characterized and conveyed the salient, underlying trade issues. Non-trade experts and non-trade-beat reporters often miss the nuance and get things wrong. Nonetheless, for the purpose of even greater precision, I’m going to reiterate, clarify, amplify, and slightly modify some of the points Kessler makes. (Thanks for being a prop, Glenn).


Globalization has changed the face of the world economy, for good or bad. In an interconnected world, it’s no longer a zero sum game in which jobs are either parked in the United States or overseas.

There is no doubt that economic interdependence – best observed as transnational investment and cross-border supply chains – has increased considerably in response to trade liberalization, political liberalization, revolutions in communications and transportation, as well as other developments, such as China opening to the world. As I characterized it in this 2009 paper about the virtues of growing economic interdependence, “the factory floor has broken through its walls and now spans borders and oceans.”  One relatively unheralded consequence of this trend is that protectionism is costlier than ever.  And that’s a great thing.  It helps explain why the world avoided descending into an abyss of “tit for tat” protectionism during and after the Great Recession, and why it’s unlikely to do so in the future. This paper, which goes into greater detail about why protectionism would be eschewed, was a bit heterodox at the time."

But let me slightly modify Kessler’s explanation.  It’s not interconnectedness that makes trade “no longer a zero sum game.” Trade is never a zero sum game. If trade were a zero sum game, it would never happen.  Two people trade because each expects to gain from the exchange. If I shine your shoes for $5, it’s because you value shiny shoes more than you value $5 and I value $5 more than the time, materials, and effort I expended.


First of all, a trade deficit means that people in one country are buying more goods from another country than people in the second country are buying from the first country. Trump frequently suggests the United States is “losing money” when there is a trade deficit, but that reflects a fundamental misunderstanding. Americans want to buy these products from overseas, either because of quality or price. If Trump sparked a trade war and tariffs were increased on Chinese goods, then it would raise the cost of those products to Americans. Perhaps that would reduce the purchases of those goods, and thus reduce the trade deficit, but that would not mean the United States would “gain” money that had been lost.

A noxious fallacy that perpetuates confusion and fuels antipathy toward trade and trade agreements is that trade is a competition played between national teams where the objective is to obtain a trade surplus.  Under this “Us versus Them” portrayal, exports are Team America’s points; imports are the foreign team’s points; the trade account is the scoreboard; and, since the scoreboard shows a deficit, the United States is losing at trade.

But trade is not a team sport. Trade is conducted by billions of individuals, each seeking to obtain value by exchanging some of their specialized output (monetized in the form of salaries or wages) for some of the specialized output of others. The purpose of trade policy is not to secure a trade surplus, but to facilitate this process of specialization and exchange and, ultimately, to produce economic growth. 

The United States has registered trade deficits for 41 consecutive years. Over those 41 years, increases in the size of the deficit have correlated with increases in GDP and decreases in the size of the deficit have correlated with decreases in GDP. Achieving a trade surplus is not the objective of trade policy. Nor is a trade deficit evidence of its failure. If there is compelling evidence to support the theory that trade deficits are bad for the United States, it has not been presented in the context of the U.S. trade policy debate. Certainly there is much rhetoric and opining about the deleterious effects of the trade deficit on the economy, but where is the support? After 41 straight years of annual trade deficits, surely economists like Rob Atkinson, Jared Bernstein, Dean Baker, Peter Morici, and other trade skeptics can identify – if not quantify – the damage done.

The objective of trade policy is economic growth. That’s why we trade – to create value. The data strongly suggest that economic growth and trade deficits increase and decrease contemporaneously. Looked at another way, if the goal of trade policy is to achieve a trade surplus, then by extension the goal of trade policy is slower economic growth, even contraction.


Trump did manage to name specific countries with which the United States has trade deficits, but he’s wrong when he says the United States has a deficit with “everybody.” There’s barely a trade deficit with the United Kingdom, according to the International Trade Commission, and the United States has a trade surplus with Hong Kong ($30 billion), Netherlands ($24 billion), United Arab Emirates ($21 billion), Belgium ($15 billion), Australia ($14 billion), Singapore ($10 billion) and Brazil ($4 billion), among others.

Of course, the Fact Checker was merely checking Trump’s claims, but I’d say: Waste of time? Bilateral trade accounts are meaningless. They’re meaningless because of the observations made with respect to Point 1, above.

In a globalized economy of cross-border investment and transnational production sharing, where nearly two-thirds of the value of global trade flows are intermediate goods, bilateral trade accounting is simply meaningless. A $300 import from China adds $300 to the aggregate value of imports from China, regardless of whether the Chinese material, labor, and overhead (the Chinese value-added) accounts for all or just a fraction of that $300 cost. It adds $300 to the U.S. bilateral trade deficit with China even if $250 of the $300 cost is attributable to the value of components made in the United States with U.S. labor and overhead. This is not merely theoretical. Nearly 50 percent of the value of all U.S. imports from China is the value of components from other countries. When it comes to electronics, such as computers and smart phones, the foreign value content can account for as much as 95 percent of the cost, yet the product’s entire cost is chalked up as an import from China. This should give pause to those who attach meaning to bilateral trade accounting.  


Trade can lead to job losses — as well as job gains. A domestic widget-maker might lose market share, and cut staff, if lower-cost imports undercut prices. But exports also generate jobs, which is why U.S. presidents generally have sought to lower tariffs.

Granted, this is true.  But the implication that imports necessarily cost jobs is misleading, and untrue. For starters, according to the Bureau of Economic Analysis, about 60 percent of the value of U.S. imports consists of intermediate goods and capital equipment – the purchases of producers, not consumers.  This continues on the theme of interconnectedness and globalization.  What this means is that 60 percent of the value of U.S. imports are complementary goods, not substitutes.  And this is just one example of how imports support U.S. jobs. 


When speaking about the impact of trade deals, Trump (as in a USA Today opinion article) often cites research from groups, such as the Economic Policy Institute, about supposed job losses from trade agreements. Interestingly, Bernie Sanders (Vt.), a candidate for the Democratic presidential nomination, often cites the same data — such as a claim that 800,000 jobs were lost because of the North American Free Trade Agreement.

The job-loss figures often rely on simplistic formulas that are disputed by other economists. It is often difficult to separate out the impact of trade agreements on jobs, compared to other, broader economic trends. (Readers should also be wary of claims of job gains from trade deals, as we noted in this column on the Trans Pacific Partnership.)

I couldn’t agree more – on both sides.  The pro-trade and anti-trade jobs numbers aren’t at all reliable.  But EPI should be held out for special scorn.


The manufacturing sector has declined as a source of jobs in the United States, but again Trump would be fighting against economic shifts long in the making. American manufacturing has becomes incredibly productive, so fewer workers are needed to make the same number of goods.

“In real terms, U.S. factories produced more output (looking at straight output or value added) last year than ever before in history,” said Dan Ikenson, director of trade policy studies at the Cato Institute. “Year after year (with the exception of during recessions), the sector breaks new records with respect to output, revenues, exports, imports, return on investment.” 

I elaborate further in today’s Forbes piece.


Similarly, Trump’s complaints about currency manipulation are woefully out of date. Fred Bergsten, senior fellow at the Peterson Institute, calls himself “a big hawk” on currency manipulation but says Trump is “way out of whack.”

China has not manipulated its currency for at least two years and in recent months has been selling dollars and running down its reserves in an effort to keep the currency from weakening during an economic slowdown. Japan has not sought to lower its currency for at least a decade, with the exception of an intervention in March 2011 — a move that was supported by other leading economic powers because the yen had appreciated sharply in the wake of the devastating tsunami and earthquake.

The currency issue is a red herring, and now it is irrelevant, as China is attempting to prop up the value of its currency, as sentiment on the Chinese economy has soured.  This piece goes into a good bit of detail about the long-running debate and what to do about the issue.


In fact, there is evidence that some manufacturing jobs are already coming back to the United States, through a process known as “reshoring,” because Chinese wages are no longer as competitive. General Electric in 2012 brought back nearly 4,000 jobs from China and Mexico, for instance. Marriott International said in March it would manufacture in the United States all of its towels for its hotels.

Many factors, not just wages, affect investment location decisions. The idea that investment chases low wages and lax environmental standards couldn't be further from the truth.  This paper explains.


Trump’s claims on trade, currency manipulation and manufacturing are either wrong or no longer valid. If he became president, he (and his supporters) would have a rude shock that the problems he complains about are overstated or no longer exist — and solutions such as raising tariffs might backfire. Taken together, his vision is a whopper.