The Trade Deficit Has Nothing to Do with Tariffs

In August, the U.S. trade deficit hit a seasonally adjusted $106 billion, the highest total since President Trump announced his sweeping tariff regime and companies rushed to buy imports. Since those tariffs, the trade deficit has stayed around normal levels. But aside from the three months before Liberation Day, it has never been wider than it is now.

President Trump imposed the tariffs, in his own words, to close a trade deficit which he deemed a “national emergency.” To his mind, when the United States imports more goods than it exports, it loses money to foreign countries. His original tariff schedule was based on a cockamamie formula that divided bilateral trade deficits by overall imports from each country. The numbers it produced were supposed to represent the cumulative effect of all foreign trade barriers, apparently assuming that, with completely fair trade, the United States would have zero trade deficit (or even a surplus) with every country in the world. Trump then chopped those made-up rates in half as a generous “discount.”

All of this was complete nonsense.

First, the nation does not lose money when it imports more goods and services than it exports. If you focus exclusively on these two kinds of transactions, then yes, Americans are sending more dollars abroad than foreigners send here. But we are no more “losing money” on imports than you are “losing money” when you buy groceries or pay for a haircut. Companies and individuals purchase imports because they have value. There is no loss in mutually beneficial transactions, even when aggregated.

Second, the nation isn’t even sending more dollars abroad than it receives when you zoom out beyond mere imports and exports. Foreigners typically want to do something more with the dollars they get than stuffing them under their mattresses. So virtually every dollar sent abroad returns to America in one form or another. If foreigners aren’t using all the dollars they receive to buy U.S. exports, they can invest the remainder in U.S. companies and markets, loan it to U.S. borrowers, spend it with U.S. companies operating internationally, or travel to the United States and buy things here.

Through these channels, the trade deficit is canceled out — almost dollar-for-dollar over a long enough time period — by an equal investment and financial surplus. Foreigners invest far more money in America than Americans invest in foreign countries. Such a surplus naturally occurs when a country’s investment opportunities exceed its supply of savings. And why wouldn’t that be the case here? U.S. capital markets are the envy of the world, and our economy is arguably the best among all developed nations.

The truth is that our financial surplus mostly determines our trade deficit, not the other way around. We have no shortage of goods and services to export if foreign dollars wanted to buy them, but they would rather use their dollars to invest in our companies, lend to our government, and buy our assets. We should treat that preference as a compliment.

And yes, our enormous capital surplus results in an equally enormous trade deficit. But tariffs can’t do much about that, because they don’t fundamentally change foreigners’ investment choices. So long as other countries want to invest more in America than we want to reciprocate, the difference will always show up in net imports, even if they are made more expensive by duties.

Through our trade deficit, we receive many more tangible goods of value than we have to give up in return because the U.S. economy is exceptionally attractive. Some kind of “national emergency.”