Are Trade Deficits Good or Bad for the US?
Bill Oxford / iStock.com  A trade deficit occurs when a country imports more than it exports  and thats a good thing for a national economy. Or a terrible thing. Or it might not matter one way or the other. Trade deficits are so complex that economists cant even agree on if theyre helpful or harmful. But if deficits are as terrible as some would have you believe, America is in deep trouble. The richest country in the world has run a trade deficit every single year since 1976. Its a Simple Concept  In basic terms, a country runs a deficit  also called a negative balance of trade  when the value of the goods and services it buys from other countries is greater than the value of the goods and services that it sells overseas. In the United States, the Bureau of Economic Analysis (BEA) is the agency in charge of recording and defining Americas trade deficit. The BEA defines imports as goods that are produced in foreign countries and that pass through U.S. customs for sale in America. Exports are goods that are produced in the United States and that pass through customs going the other way for sale in foreign countries. An imbalance with more than one country is called a multilateral trade deficit, as opposed to a bilateral trade deficit, which exists between only two countries. Americas biggest bilateral trade deficit by far is with China  $310.8 billion in 2020 alone. Subtract exports from imports in a given time period and youve got the trade deficit. The U.S. imported about $2.81 trillion worth of goods and services in 2020 but exported only about $2.13 trillion for a trade deficit of $678.7 billion. The BEAs economists wish it were that easy. More Economy Explained: All About the Federal Budget and Its Role in Your Life  But It Gets Complicated Quickly  An imbalance between stuff coming in and stuff going out is a simplification thats easy to understand, but trade deficits also occur when:  Story continues  A country borrows from other countries to pay for imports. The dollar strengthens and imports become cheaper. A country ships raw materials overseas to manufacture products in another country. In that case, the raw materials count as exports, but if the manufactured products those raw materials become re-enter the country, they count as imports and are subtracted from the GDP. An American pays for services overseas  like hotel stays, restaurant meals and even traveling itself  all of which the BEA counts as imports. These same rules apply to services that are harder to quantify, like business advertising, licensing and royalties. But it gets even trickier than that. Americas trade balance is just one part of a larger diagnosis of the countrys give-and-take relationship with the international community. Called the balance of payments, this measure of the U.S. economys transactions with the rest of the world includes the trade balance as well as things like the buying and selling of foreign assets. The Great Deficit/Debt Debate  The Council on Foreign Relations points out that some economists consider trade deficits to be the same as debts because they represent a negative economic imbalance  America spends more on things it buys overseas than it earns from things it sells overseas. Others, like those at the Cato Institute, argue just as convincingly that trade deficits are not the same as debts to be repaid by future generations. Its different than debt, they argue, because deficits dont always have to be repaid, they often involve unfavorable terms for the lender when they do and they give something tangible to future generations to exchange if they ever do find themselves on the hook. Its worth noting that trade deficits are among the rare issues that often unite the political and philosophical right and left. Both Bernie Sanders and Donald Trump, for example, despise trade deficits, albeit for different reasons. Trade Deficits Arent Always Bad  There is a lot of stigma around trade deficits, and its easy to view counties that run deficits as losing to trade partners that run surpluses, but thats a convenient simplification of a very complex dynamic. Deficits can improve a countrys standard of living, for example, by exposing its population to new products from different markets that are produced at competitive prices. Those low prices keep inflation in check, and anyway, theres no direct correlation between a trade surplus and a strong economy. But They Sure Can Be  Those previously mentioned gains are often fleeting. The longer a country runs a deficit, the more likely it is that businesses in industries dominated by imports will ship jobs overseas. In times of currency devaluation, imports can become more expensive and when a country is too dependent on imports, its economy can be especially vulnerable to economic downturns. In the end, the widgets you like to buy from China might be cheaper when America runs a deficit, but if you work in a factory that makes those same widgets, you might want to consider a side hustle. This article is part of GOBankingRates Economy Explained series to help readers navigate the complexities of our financial system.