Five Reasons Why the Focus on Trade Deficits Is Misleading

In his criticism of trade agreements and policies that have guided his predecessors over many decades, President Donald Trump has asserted that trade balances are a key measure of a nation’s commercial success and that large US trade deficits prove that past trade approaches have been flawed. “The jobs and wealth have been stripped from our country year after year, decade after decade, trade deficit upon trade deficit,” he has said. Using the trade deficit between the United States and Mexico as a metric, the president called the North American Free Trade Agreement (NAFTA) “the worst trade deal ever” and excoriated the Korea-US Free Trade agreement (KORUS) on similar grounds. He has told the Chinese president Xi Jinping that America’s large trade deficit with China was “not sustainable.”

Trump also argues that the United States has signed bad trade agreements that have opened the US market and encouraged US firms to move offshore while allowing foreigners to maintain high trade barriers and engage in unfair trade practices. According to him, this deeply flawed approach has resulted in the loss of millions of US manufacturing jobs due to offshoring and imports flooding the US market.

Accordingly, the president and his trade advisors believe that the aim of US trade policy should be to reduce these trade deficits and, ideally, turn them into surpluses. In pursuit of that objective, the administration has canceled American participation in the Trans-Pacific Partnership (TPP), demanded a renegotiation of NAFTA and KORUS, while raising tariffs to protect US industries that produce washing machines, solar panels, aluminum, and steel. Additionally, the administration has launched a campaign against the dispute settlement system of the World Trade Organization (WTO), claiming that it is has failed to deal with the unfair trade practices of countries such as China.