In truth, our trade deficits benefit Americans

While the Trump administration’s economic policies are aimed at least partly toward eliminating the nation’s balance of payments deficits, Americans should understand that they benefit from those deficits.

A balance of payments deficit occurs when the value of goods imported exceeds the value of goods exported. In short, we are getting more than we are giving up, and that’s good for Americans.

We have to pay for those goods, of course, and one issue critics raise is that a balance of payments deficit means that American dollars are flowing overseas. That’s correct, but what happens to those dollars?

Some of those dollars stay overseas. The U.S. dollar is the world’s reserve currency, which means that many transactions not involving the U.S. are undertaken with dollars. Dollars are cheap to create, so when foreigners obtain dollars to use in their transactions, we benefit by cheaply printing up dollars and getting valuable goods in return. Those dollars that stay overseas impose no cost on us.

Some of those dollars come back into the country in the form of foreign investment. President Trump seems to like it when foreign businesses or individuals invest in the U.S., but where do they get the money to invest in the U.S. economy? They get money to invest in the U.S. by selling goods to us. It comes from our balance of payments deficit.

More foreign investment increases the productivity of our economy, and foreigners like to invest in the U.S. because it is the safest and most productive economy in the world. Foreign investment adds to domestic investment. There is not a fixed amount of investment, so foreign investment does not reduce domestic investment. It adds to the investment Americans are undertaking. More investment in the U.S. economy, wherever it comes from, benefits the U.S.

The balance of payments deficit benefits Americans because:

1. We can consume more in foreign goods than we export to foreigners. Because we get more in terms of foreign goods we import than we give up in American goods we export, our standard of living rises. 
2. Many of the dollars we pay for those goods stay overseas so people in other countries can use them for their transactions. It costs us almost nothing to produce dollars. A balance of payments deficit means we send cheap-to-produce dollars overseas and get valuable goods in return.
3. Many of the dollars that go overseas come back as foreign investment in the U.S. economy. Greater investment increases the productivity of our economy. 

Those who object to our balance of payments deficits argue that American jobs are being shipped overseas and that this has resulted in de-industrialization of the U.S. and reduced our national security. According to the Federal Reserve Bank of St. Louis, U.S. industrial output has increased by 50% since 1990. While it did show substantial dips during the 2008 recession and during the 2020 COVID pandemic, it has bounced back since then. 

While it is true that manufacturing employment as a share of the labor force has been falling, that’s mostly because manufacturing is becoming more automated. U.S. manufacturing output is near an all-time high.

While some argue that the balance of payments deficit is taking American jobs, the current unemployment rate is 4.2%, which most economists would call full employment. It’s difficult to argue that the balance of payments deficit is costing American jobs when the economy is at full employment.

The U.S. has run a balance of payments deficit every year since 1975, and during that half-century, the American economy has prospered. The Federal Reserve Bank of St. Louis reports that real output (GDP) is 60% higher today than it was in 2000. 

Americans who think that our on-going balance of payments deficits are hurting the economy are mistaken. Our balance of payments deficits benefit Americans. 

Randall G. Holcombe, the DeVoe Moore professor of Economics at Florida State University, was one of 25 renowned American economists who authored on April 18 “An Anti-Tariff Declaration. He wrote the above column for the Observer.

Dr. Holcombe is also Senior Fellow at the Tallahassee-based James Madison Institute; a Senior Fellow at the Independent Institute in Oakland, California; and is a Research Fellow at the Law & Economics Center at George Mason University. 

He is vice president of the Mont Pelerin Society (2024-2026) and past president of the Public Choice Society and the Society for the Development of Austrian Economics. 

Dr. Holcombe is the author of 20 books and more than 200 articles published in academic and professional journals. His books include “Political Capitalism: How Economic and Political Power Is Made and Maintained” (2018); “Liberty in Peril: Democracy and Power in American History” (2019); and “Following Their Leaders: Political Preferences and Public Policy” (2023).