Why Trade Deficits Are Not Necessarily a Bad Thing

1. Why Trade Deficits Are Not Always a Bad Thing
2. Trade Deficits Are Common Among Developed Nations
3. Why the US Dollar is Rising & Can It Continue?


Today, I want to disagree with a widely-held view by the mainstream media and President Trump that trade deficits are always a bad thing. I also want to disagree with the idea that trade deficits with the US mean that our trading partners are taking advantage of us.

The fact is, most high-consuming developed nations run trade deficits with other countries. The US has the highest trade deficit in the world, and this has been true every year for decades. There are specific reasons for this, as I will explain below, and it’s not necessarily a bad thing. In some ways, it’s a good thing.

Following that discussion, we’ll take a look at why the US dollar has been rising of late, despite the widespread consensus that the greenback will continue to move lower and lower. Markets often don’t conform to the consensus view, and the latest rally in the dollar is one such example.

Why Trade Deficits Are Not Always a Bad Thing

The Trump administration and officials from Canada and Mexico continue meetings to renegotiate the North American Free Trade Agreement (NAFTA). There is much about the trade agreement that should be modernized, such as updated rules for e-commerce and stronger intellectual property protections. The president also hopes to maintain existing duty-free market access for agricultural goods, as it is important for industries in many states, including my home state of Texas.

However, the administration has also emphasized its desire to reduce the trade deficits – the degree to which the United States imports more than it exports – in the NAFTA negotiations. This is rooted in the belief that when the United States buys more from foreign countries than they buy from us, jobs increase in those countries and decrease here at home.

This is a faulty assumption but one that has unfortunately found its way into modern political dialogue and the mainstream media. Yet trade deficits are not always bad for US workers and consumers, and they should not remain the focus in NAFTA renegotiations. Here’s why.

For starters, a powerful economy such as ours often runs a trade deficit because of the immense buying power of its people. Mexico’s average net per-capita income is roughly $13,000 per family, while the average US household brings in more than $59,000 each year, according to the Census Bureau.

Thus, Americans have a far greater capacity to buy goods than do consumers in Mexico and Canada. It should come as no surprise that we do exactly that. In 2017, our trade deficit with Mexico was apprx. $71 billion, according to the Census Bureau (see chart below). Our trade deficit with Canada was $17.5 billion last year.