Trump’s Myth of the Trade Deficit

Economic growth depends on deregulation, tax cuts and the budget deficit, not on the balance of trade

By Phil Gramm and Donald J. Boudreaux. Excerpts:

"he’s announced several ambitious plans to increase foreign investment in the U.S. economy. The commitment both to eliminate trade deficits and to pursue foreign investment shows the inconsistency of the Trump administration’s policy. Trade deficits and capital surpluses are two sides of the same coin."

"if the U.S. has a surplus in its capital account balance, it must have a corresponding deficit in its trade balance."

"If Japanese tech-investing firm SoftBank fulfills its Dec. 16 commitment to invest $100 billion in the U.S., as SoftBank acquires dollars to fund the investment, the value of the dollar will rise"

"foreign capital investment creates American jobs and fuels economic growth no less than do foreign purchases of American exports."

"In the 29 years after the end of World War II, during which the U.S. had a virtual monopoly in heavy manufacturing and regularly ran trade surpluses, real per capita gross domestic product grew 2.1% a year. Over the next 29 years, from 1976 through 2004, the U.S. ran chronic trade deficits, and the average annual growth rate of real per capita GDP was virtually identical: 2.2%.

During 102 of the 120 months of the Great Depression, the U.S. ran trade surpluses. From 1900 to 1929, years of high economic growth, it also ran trade surpluses. From 1830 to 1860 and 1870 to 1890, when average tariff rates on imports were falling and the rate of industrialization was rapidly increasing, the U.S. generally ran trade deficits in goods and services.

Between 1890 and 2024, it is impossible to find a statistically significant correlation between America’s trade balance and its economic growth."

"U.S. industrial production today is more than double what it was in 1975, the last time we ran a trade surplus. It’s 55% higher than in 1994, when the North American Free Trade Agreement went into effect, and it’s 18% higher than it was when China joined the World Trade Organization in 2001. Real wages are up 19% from 1994 and 10% from 2001. The inflation-adjusted value of America’s capital stock is 36% higher today than it was in 2001, 66% higher than it was in 1994, and 178% higher than it was in 1975."

"Manufacturing as a share of total nonfarm employment peaked during World War II and has declined ever since, following the pattern of employment in agriculture, which fell from 40% of the labor force to 2% over the course of the 20th century. This is attributable not to globalization, but to the spread of modern technology and the rise in demand for services relative to goods. Neither Nafta nor China’s membership in the WTO notably increased the secular rate of decline in the share of workers employed in manufacturing."