What's so bad about a trade deficit?

Summary

Episode Summary: "What's So Bad About a Trade Deficit?"

Podcast: The Indicator from Planet Money
Host/Authors: Waylon Wong, Darian Woods, Adrienne Ma
Release Date: April 8, 2025
Duration: Approximately 10 minutes
Topic: Trade Deficits and Their Economic Implications

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1. Introduction to Trade Deficits and Tariffs

The episode kicks off with Adrienne Ma explaining the foundation of President Trump's tariffs, emphasizing his belief that trade deficits are inherently problematic. She states:

"At the core of President Trump's Earth-shaking tariffs is a belief that countries should not sell stuff to the US without buying more stuff in return. In other words, Trump hates that the US has trade deficits." (00:16)

Waylon Wong adds that the administration’s recent tariff announcements were strategically based on the United States' trade deficits with individual countries:

"For the big tariff announcement last week, the administration actually used the US Trade deficits with each country to figure out the size of their new tariffs." (00:30)

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2. Understanding Trade Deficits: Not Necessarily Negative

Darian Woods introduces the central theme by challenging the conventional negative perception of trade deficits:

"When we talk about the trade deficit, it might conjure up images of closing car factories and American workers losing their jobs. But the reality is more complex." (00:40)

Adrienne Ma elaborates, using a relatable analogy about grocery shopping to demystify trade deficits:

"If you're a person who eats food, I am guessing that you get that food from your local grocery store... 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." (02:26 - 02:56)

She underscores that:

"If the US buys more from another country than it buys from us, that is not inherently bad." (03:13)

Key points highlighted include:

• Consumer Preferences: The deficit often reflects American consumers' desire for diverse and sometimes cheaper foreign goods.

• Essential Imports: Certain products, such as rare earth minerals or specific agricultural goods, are predominantly sourced internationally.

• Service Exports: A significant portion of U.S. exports are services (financial, business, tourism), where the U.S. maintains a surplus, balancing the goods deficit.

"We're talking about financial and business services and tourism. These kinds of things make up about 70% of the U.S. economy. And when it comes to exporting these to other countries, the US actually has a pretty sizable surplus." (04:47)

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3. Investment Flows and the Overall Trade Deficit

Waylon Wong introduces the interplay between trade deficits and international investment:

"Other countries buy a ton of American financial assets. They buy stocks and real estate and U.S. treasury bonds." (05:14)

Key insights include:

• Foreign Investment: Over $8 trillion in U.S. treasuries are held by foreign investors, signifying global trust in the stability of the U.S. economy.

• Financing Consumption: The borrowed funds from foreign investments enable the U.S. to sustain higher consumption levels without necessarily producing equivalent goods.

Adrienne Ma points out:

"The US actually does depend on this borrowed money for financing also allows the US to buy more stuff than we sell to other countries." (05:50)

Waylon emphasizes the delicate balance:

"Trying to reduce the trade deficit could mean losing those foreign investment dollars the economy has come to rely on." (06:13)

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4. Trade Deficits and Employment

Darian Woods shifts the discussion to the impact of trade deficits on employment, particularly in the manufacturing sector:

"One study in the Journal of Labor Economics finds that competition from China did reduce jobs in US manufacturing in the early 2000s." (07:04)

Adrienne Ma adds context:

"Automation and productivity improvements were perhaps the biggest reason [for job losses], but for almost all of this time, the US did have a trade deficit with the world." (07:11)

Key takeaways:

• Causation Complexity: While there is a correlation between trade deficits and job losses in manufacturing, factors like automation play a more significant role.

• Overall Job Growth: Despite declines in manufacturing, the U.S. economy saw a growth of 40 million jobs across all industries during the same period.

"The US economy grew 40 million jobs overall across all industries." (08:23)

Darian further explains:

"The big promise of trade is that it helps countries specialize in what they're comparatively more efficient at... things like tourism, AI development, higher education, marketing, entertainment." (08:56)

This highlights the broader economic benefits of trade beyond mere manufacturing jobs, suggesting that reducing trade deficits would not substantially bolster overall employment.

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5. The Broader Economic Picture and Caveats

Adrienne Ma concludes with a crucial caveat regarding the trade deficit's underlying causes:

"The US 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." (09:27)

She emphasizes:

"While the government's deficit isn't in a crisis right now, it should definitely be addressed in coming years." (10:06)

This points to the interconnectedness of fiscal policy and trade balances, suggesting that addressing trade deficits may require broader economic reforms beyond simply adjusting trade policies.

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6. Conclusion

The episode effectively demystifies the concept of trade deficits, challenging the notion that they are inherently detrimental. By exploring the nuances of consumer behavior, international investment, and employment trends, the hosts illustrate that trade deficits are a multifaceted economic indicator. However, they also caution that persistent deficits intertwined with government borrowing could have long-term implications that warrant attention.

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Notable Quotes with Timestamps

• Adrienne Ma (00:16): "At the core of President Trump's Earth-shaking tariffs is a belief that countries should not sell stuff to the US without buying more stuff in return."

• Adrienne Ma (02:26): "If you're a person who eats food, I am guessing that you get that food from your local grocery store... 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."

• Adrienne Ma (03:13): "If the US buys more from another country than it buys from us, that is not inherently bad."

• Waylon Wong (05:14): "Other countries buy a ton of American financial assets. They buy stocks and real estate and U.S. treasury bonds."

• Darian Woods (07:04): "One study in the Journal of Labor Economics finds that competition from China did reduce jobs in US manufacturing in the early 2000s."

• Waylon Wong (06:13): "Trying to reduce the trade deficit could mean losing those foreign investment dollars the economy has come to rely on."

• Adrienne Ma (09:27): "The US trade deficit is in large part driven by the government's deficit... it should definitely be addressed in coming years."

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This episode provides a balanced perspective on trade deficits, elucidating why they are not simply a negative indicator and how they interplay with broader economic factors. It serves as an insightful resource for listeners seeking to understand the complexities of international trade and its impact on the U.S. economy.

Transcript

[NPR]

Npr.

[Waylon Wong]

This is the indicator from Planet Money. I'm Waylon Wong.

[Darian Woods]

And I'm Darian Woods.

[Adrienne Ma]

And I'm Adrienne Ma. At the core of President Trump's Earth shaking tariffs is a belief that countries should not sell stuff to the US without buying more stuff in return. In other words, Trump hates that the US has trade deficits.

[Waylon Wong]

Yeah. For the big tariff announcement last week, the administration actually used the US Trade deficits with each country to figure out the size of their new tariffs.

[Darian Woods]

And when we talk about the trade deficit, it might conjure up images of closing car factories and American workers losing their jobs. But 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.

[NPR]

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[Darian Woods]

To talk about three reasons why we shouldn't worry so much about the trade deficit. First up, Adrian Ma, take us away.

[Adrienne Ma]

So for Trump, any trade deficit that the US has with another country is a problem. His big tariff policy announcement last week essentially aims to eliminate trade deficits. But 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?

[Darian Woods]

How did you know?

[Waylon Wong]

Bullseye.

[Adrienne Ma]

Lucky guess. And if you are a person who eats food, I am guessing that you get that food from your local grocery store.

[Darian Woods]

Oh, is that true?

[Waylon Wong]

Oh, yes. Also an inveterate coupon clipper here.

[Adrienne Ma]

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.

[Darian Woods]

They don't want my podcasts.

[Waylon Wong]

How very dare they?

[Adrienne Ma]

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 US Buys more from another country than it buys from us, that is not inherently bad. Partly it's just a reflection of what US 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. So, in short, trade deficits, not inherently bad. And just one more piece of context to add here. The US 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 US 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% of the U.S. economy. And when it comes to exporting these to other countries, the US Actually has a pretty sizable surplus, which, again, is.

[Waylon Wong]

Neither inherently good nor bad.

[Darian Woods]

Ok, 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?

[Waylon Wong]

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 US and other nations, and that is investment. Other countries buy a ton of American financial assets. They 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.

[Adrienne Ma]

Right?

[Darian Woods]

Because the US has historically been this very safe and reliable place to invest. And the US Dollar is also the currency of choice for doing business around.

[Adrienne Ma]

The world because people, investors expect the US Government will pay its debts on time, and that's why they keep buying U.S. treasuries.

[Waylon Wong]

And this brings us to the question of, okay, are these investment flows good or bad? And here is the situation. The US really does depend on this borrowed money for financing also allows the US to buy more stuff than we sell to other countries.

[Darian Woods]

So the flip side of a deficit in goods is a surplus in investment.

[Waylon Wong]

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.

[Adrienne Ma]

Funny enough, like surplus in investment sounds a lot more positive than deficit in trade.

[Darian Woods]

So it's like one of those optical illusions where it's either a rabbit or an elderly woman.

[Waylon Wong]

It'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?

[Darian Woods]

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.

[Adrienne Ma]

Right. Some people might picture emptying factory towns where the reason given is often competition with China.

[Darian Woods]

Yeah. One study in the Journal of Labor Economics finds that competition from China did reduce jobs in US manufacturing in the early 2000s. American manufacturing jobs slid down in the 1980s and really took a dive in the early 2000s. Now, 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 US did have a trade deficit with the world.

[Waylon Wong]

And of course, correlation does not equal causation. But you look at all these factors, and it does raise some questions. Right?

[Darian Woods]

For sure. And so the question is, if the US 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. We 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 US Trade deficit.

[Waylon Wong]

Yeah. You can't just say we're taking it down to zero.

[Darian Woods]

The second thing to keep in mind is manufacturing workers as a share of the overall US 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 2000s. And that is extremely painful for those workers and their families. But at the same time, the US economy grew 40 million jobs overall across all industries.

[Adrienne Ma]

So we're talking about like a 10x.

[Darian Woods]

Increase even more than 10 times. And the big promise of trade is that it helps countries specialise in what they're comparatively more efficient at. For the us, 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.

[Adrienne Ma]

So 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 US trade deficit may not be a problem on its own, but could reflect issues elsewhere in the economy. So, for example, the US 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.

[Darian Woods]

This episode was produced by Julia Ritchie with engineering by Kwesi Lee. It was fact checked by Sierra Juarez. Kate Concannon is our show's editor and the indicator is a production of npr.

[NPR]

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