What's so bad about a trade deficit?

And I'm Adrienne Ma. At the core of President Trump's Earth shaking tariffs is a belief that countries should not sell stuff to the US without buying more stuff in return. In other words, Trump hates that the US has trade deficits.

Yeah. For the big tariff announcement last week, the administration actually used the US Trade deficits with each country to figure out the size of their new tariffs.

So, for Trump, any trade deficit that the US has with another country is a problem. His big tariff policy announcement last week essentially aims to eliminate trade deficits. But let's just do a quick thought exercise, right? If you're listening to this show, I would bet that you're the kind of person that eats food. Am I right?

Bullseye.

Lucky guess. And if you are a person who eats food, I am guessing that you get that food from your local grocery store.

Oh, yes. Also an inveterate coupon clipper here.

I'm on a roll. I must be psychic, guys. So month after month, year after year, you are buying thousands of dollars worth of groceries from your local grocery store, but at the same time, they never buy anything from you.

How very dare they?

And you could say what you have here is a large and growing trade deficit with your grocery store. And you don't really get bent out of shape about it because, well, you're giving them something they want. Money in exchange for something you want. Food. So you can extend this logic to trade between countries. If the US Buys more from another country than it buys from us, that is not inherently bad. Partly, it's just a reflection of what US Consumers want to buy from other countries, whether it's, you know, cheap clothes or cars from South Korea. Also, there are a lot of products we can pretty much only get from other countries, like cocoa beans or potash fertilizer or rare earth minerals. So, in short, trade deficits, not inherently bad. And just one more piece of context to add Here the US does have a negative trade deficit with, you know, the world. It buys more than it sells to other countries. But the Trump administration, in calculating its tariffs on other countries, is really focused solely on the trade in goods. But the fact is that a lot of what the US Exports to other countries is actually services. Right? We're talking about financial and business services and tourism. These kinds of things make up about 70% of the U.S. economy. And when it comes to exporting these to other countries, the US Actually has a pretty sizable surplus, which again, is

neither inherently good nor bad.

Right, so as we've been talking about right now, the debate over the trade deficit kind of boils down international trade to like a big global shopping mall where countries are buying and selling physical goods. And this view of trade neglects a huge way that money flows between the US and other nations, and that is investment. Other countries buy a ton of American financial assets. They by stocks and real estate and U.S. treasury bonds and, you know, treasury bonds. As a little reminder, These are essentially IOUs issued by the federal government. American investors buy most of these IOUs. However, foreign investors own over $8 trillion worth of treasuries.

the world because people investors expect the US Government will pay its debts on time, and that's why they keep buying U.S. treasuries.

And this brings us to the question of, okay, are these investment flows good or bad? And here is the situation. The US really does depend on this borrowed money for investment. This financing also allows the US to buy more stuff than we sell to other countries.

Yes, this shows up in all of your kind of Economics 101 textbooks. A lot of economists say this is where the trade deficit comes from. So trying to reduce the trade deficit could mean losing those foreign investment dollars the economy has come to rely on.

Funny enough, like surplus in investment sounds a lot more positive than deficit in trade.

It's like, is it a young woman or an old woman? The choice is not rabbit woman. Okay, so we'll set the optical illusion confusion aside for now. And Darian, can you Tell us about jobs.

Right. Some people might picture emptying factory towns where the reason given is often competition with China.

And of course, correlation does not equal causation. But you look at all these factors and it does raise some questions, Right?

And.

Yeah, you can't just say we're taking it down to zero.

So we're talking about like a 10x

So we've covered three perspectives on why trade deficits are not inherently a bad thing. But we should also add one caveat here, which is that the US trade deficit may not be a problem on its own, but could reflect issues elsewhere in the economy. So, for example, the US Trade deficit is in large part driven by the government's deficit, which is to say the government borrowing more money than it actually takes in in taxes. And the mainstream view of economists is while the government's deficit isn't in a crisis right now, it should definitely be addressed in coming years.