Tariffs aside, trade deficits aren’t all bad
One argument the White House has used to justify raising tariffs is that they would reduce the growing US trade deficit, thereby helping the economy.
But it’s not clear that the trade gap is hurting the economy. The deficit totaled $918.4 billion in 2024, the second highest total ever (exceeded only in 2022). That amounts to 3.1% of GDP.
There’s a very simple argument against the notion that trade deficits have damaged the economy. That’s the fact that since the trade balance turned consistently negative in 1976, the economy has averaged solid annual GDP growth of 2.5% to 3%, according to Google’s artificial intelligence.
A trade deficit can actually stem from a strong economy. It can reflect growing wealth for consumers and/or businesses that allows them to afford imports.
Siegel’s example of benefits
The dollars being spent on foreign goods also can come back to boost the economy. Jeremy Siegel, the renowned professor emeritus of finance at the University of Pennsylvania’s Wharton School, offers an educational example in The Wall Street Journal.
Say an American buys a $40,000 Toyota car made in Japan. Toyota has three options for what to do with these dollars, Siegel says.
1. “It can buy $40,000 worth of US goods or services, in which case there would be no trade deficit.”
2. “It can invest $40,000 in US capital—say, the S&P 500 index, US government bonds or American real estate.” That’s obviously good for the economy.
3. If Toyota doesn’t want to buy US products or financial assets, it can sell the dollars for another currency. But those entities that buy the dollars may well use them to buy US products or financial assets.
Services surplus
One other point to keep in mind is that the US deficit stems only from trading of goods. When it comes to services, such as software and cloud services, the US ran a surplus of $293.3 billion in services last year. Of course, that meant a huge deficit in goods — $1.21 trillion.
The goods deficit largely reflects the fact that it’s more economical to produce some goods overseas rather than in the US. But it also can mean that some domestic manufacturers have difficulty selling their goods here. This in turn can mean fewer jobs and lower economic growth.
So there are some bad implications from the US trade deficit, but also keep in mind the good ones.
