The Corner

Economy & Business

U.S. Trade Deficit Widens, Which Is Fine

On Monday, the U.S. goods trade deficit (which excludes data on services) widened slightly more than economists expected it to, and now stands at $65.1 billion. That is not a bad thing, but the political response to it could be.

Trade deficits, in the words of Kevin D. Williamson, “happen because intelligent people holding a fistful of dollars very often decide to forgo the consumption of American consumer goods in order to invest in American assets.” Yes, the United States runs a current-account deficit, which means it imports more than it exports. It also runs a corresponding capital-account surplus, which means Americans receive more capital from foreign investors than they invest in foreign countries. These balance because when Americans buy imported goods, the sellers of those goods have to do something with their revenue. Here’s Kevin to explain again:

When Walmart orders $1 million worth of flip-flops from a Chinese concern, those Chinese gentlemen receive 1 million delicious U.S. dollars, which they are very happy and grateful to have. But what can you do with U.S. dollars? You can buy stuff from U.S. companies or you can buy assets from sellers who take U.S. dollars, which ultimately means U.S.-based investments.

That’s the basic idea of the balance of payments. Of course, it’s more complicated than that (people don’t all use the same currency; people don’t have to spend the money they make), and sometimes a persistent, large trade deficit can indeed be a bad thing. Sometimes. Right now, in the United States, it’s not. This trade report doesn’t tell the story of a staggering economy, it tells the story of an ongoing economic expansion in which more people and businesses are buying imported goods and more foreign investment is taking place.

But that might not matter to our politicians. They’ve recently picked up the occupational habit of pontificating irresponsibly on trade. President Trump reportedly described his position as “I want someone to bring me some tariffs,” and Democrats seem inclined to agree. Renegotiations to the North American Free Trade Agreement (NAFTA) are happening right now, a deal Trump has threatened to “terminate.” The problem is that punishing consumers for preferring Italian sausages or punishing foreign companies for not being American companies won’t fix much of anything. Populism on trade might sound good, but it isn’t sound. Remember that next time someone cites these numbers in support of a protectionist agenda.

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