Is the Trade Deficit a Problem?

Start Here: Your Personal Trade Balance

Imagine a year of your own trade with the people you do business with:

What the Trade Deficit Measures

1 Exports, imports, and the balance

A trade deficit means a country’s residents buy more from the rest of the world than they sell to it. Here is the United States in 2025:

The United States buys more goods than it sells, but it sells more services than it buys. Software, finance, travel, entertainment, and the education of foreign students are all services. In the first nine months of 2026, the trade deficit was 12.2 percent smaller than in the same months of 2025, as exports grew faster than imports.

2 Who actually trades

Countries don’t trade. People and businesses do. As an economist at the St. Louis Fed puts it, “while we often talk about international trade in terms of one country trading with another country, it is actually the people within those countries who are the trading partners.” A store owner in Rock Hill orders goods from a factory in Vietnam. A farmer in Canada buys tractor parts from a company in Iowa. “These individual transactions by consumers and businesses are added up and reported as international trade statistics.”

The Why Do We Trade? reading explained that a voluntary trade happens only when both sides expect to gain. Each import in the national total was a choice made by someone spending their own money, with their own skin in the game. The trade deficit is what you get when you add up millions of those choices. It is an accounting total, not a decision anyone made.

3 One piece of the balance of payments

The trade balance is only one part of a larger set of accounts called the balance of payments. The Congressional Research Service explains that “each transaction in the balance of payments has a corresponding and offsetting transaction: a surplus or deficit in the merchandise trade account is offset by a transaction in the financial accounts.” Dollars spent on imports don’t disappear. The sellers abroad use them to buy U.S. exports or to invest here, in stocks, bonds, real estate, and factories.

Over time, those inflows add up. At the end of June 2026, Americans owned $46.97 trillion in foreign assets, and foreigners owned $69.39 trillion in U.S. assets. The difference, called the net international investment position, was –$22.42 trillion. Not all of that gap comes from borrowing. In the second quarter of 2026, U.S. liabilities grew by $4.87 trillion, and $3.95 trillion of that came from rising prices of U.S. stocks and other assets that foreigners already owned.

4 Saving and investment

5 Why country-by-country scores mislead

A smartphone assembled in China counts as a full-price import from China, even if its chips came from Taiwan and South Korea and its design came from California. Insisting on balanced trade with each country is like insisting on balanced trade with your grocery store. Look at what happened in 2025, as new tariffs hit imports from China harder than imports from other places:

Buying shifted away from China and toward Vietnam and Taiwan, but the total barely moved. That is what the saving–investment idea predicts.

A Long History

Trade deficits are not new. Economists at the St. Louis Fed found that from 1800 to 1870, the United States “ran a trade deficit for all but three years.” From 1870 to 1970, as the country industrialized, it ran steady surpluses. Around 1970 the deficits returned, and they have continued since. The United States has run an overall deficit in goods and services every year since 1976.

The turn toward surpluses came before the World Wars. By 1870, the St. Louis Fed economists write, “improved manufacturing methods and the proliferation of railroads” had moved the country into mass production. In 1869 the United States imported three times as many manufactured goods as it exported, but by around 1900 it ran “a full-fledged surplus in manufactured goods.” The wars added to the pattern. After World War II, the United States produced over half the world’s manufacturing and “was almost the sole source of supply for many industrial goods needed by a war-torn world.” Those countries had few dollars to pay with, so U.S. government aid programs “covered nearly one-third of total United States exports” in 1946 and 1947. The American surplus was matched by Americans lending and giving abroad, the balance of payments at work in reverse.

The deficits that returned around 1970 coincided with the end of the Bretton Woods system, the postwar arrangement that tied the dollar to gold. Afterward, in the St. Louis Fed economists’ words, “the U.S. dollar became as good as gold,” and foreigners were willing to hold U.S. dollar securities as a safe store of value.

The nineteenth-century deficits are a useful test. The OpenStax textbook explains that the foreign money “was mostly invested in projects like railroads that brought a substantial economic payoff.” The string of deficits “did not hold back the economy at all,” and the United States had the world’s highest income per person by around 1900. The modern deficits have come during decades in which Americans also became far richer.

Thinkers Who Shaped the Debate

6 David Hume: The water finds its level

In the 1700s, many European governments followed mercantilism, the idea that a nation grows rich by selling more than it buys and piling up gold. The Scottish philosopher David Hume answered in his 1752 essay on the balance of trade. He wrote that the “strong jealousy with regard to the balance of trade, and a fear, that all their gold and silver may be leaving them” was “almost in every case, a groundless apprehension.” If a country lost most of its money, prices there would fall, its goods would become cheap, and money would flow back. “All water, wherever it communicates, remains always at a level.”

READ THE ORIGINAL Of the Balance of Trade (David Hume, 1752)

7 Adam Smith: An absurd doctrine

Hume’s friend Adam Smith went further in The Wealth of Nations in 1776. “Nothing, however, can be more absurd than this whole doctrine of the balance of trade,” he wrote. The doctrine assumed that when two places trade, “if the balance be even, neither of them either loses or gains,” but if it leans to one side, “one of them loses and the other gains.” Smith’s point was that both sides of a voluntary trade can gain, whatever the balance.

8 Ben Bernanke: The causes may lie abroad

In a 2005 lecture in St. Louis, Federal Reserve Governor Ben Bernanke argued that a “global saving glut” helped explain the U.S. deficit. After financial crises in the 1990s, many developing countries shifted from borrowing to saving and lending, and much of that saving flowed to the United States. Bernanke wasn’t simply relaxed about it. He called it “quite undesirable as a long-run proposition” for poorer countries to lend large sums to rich ones. His answer was to help those countries become good places to invest, so more of the world’s saving would stay there.

9 Warren Buffett: Selling the farm

The investor Warren Buffett is one of the best-known critics. In a 2003 essay in Fortune, he told a parable about two islands, Thriftville and Squanderville. The Thrifts work hard and sell food to the Squanders in exchange for IOUs, then use those IOUs to buy Squanderville’s land. “In effect, Squanderville has been colonized by purchase rather than conquest.” Buffett compared the United States to a rich family that, to consume more than it produces, keeps “selling pieces of the farm and increasing the mortgage on what we still own.” His remedy was not a tariff on particular goods or countries. He proposed giving exporters certificates that importers would have to buy, which would limit total imports to the level of exports while leaving the market to decide what was traded.

READ THE ORIGINAL America’s Growing Trade Deficit Is Selling the Nation Out From Under Us (Warren Buffett, Fortune, 2003)

10 Michael Pettis: Imbalances are made at home

The economist Michael Pettis, writing with the journalist Matthew Klein in Trade Wars Are Class Wars (2020), argues that large surpluses abroad often come from policies that hold down what households can spend, such as low wages, weak safety nets, and support for producers. “If domestic demand is too weak to absorb national output,” Pettis wrote in 2025, “these countries must externalize the cost of weak domestic demand by running trade surpluses.” In his view, when surplus countries favor producers over consumers, “the deficit countries with which they trade are effectively prioritizing consumers over producers, whether they choose to or not.”

WATCH Trade Imbalances (Marginal Revolution University)

Is It a Problem?

The Congressional Research Service notes that some observers see the deficit as costing jobs or reflecting unfair trade, but “most economists contend this mischaracterizes the nature of the trade deficit.” It adds that “most economists conclude the trade deficit stems largely from U.S. macroeconomic policies and an imbalance between saving and investment in the economy.” A St. Louis Fed economist concluded that as long as Americans earn enough on their foreign investments, “the trade deficit can be paid for and is not a major concern.” Still, the textbook rule is that it depends on what the borrowing pays for. It makes sense to borrow from abroad “as long as it wisely invests the money in ways that will tend to raise the nation’s economic growth over time.”

Is the Deficit a Reason to Bring Production Home?

The trade deficit is often given as a reason to make more things in the United States. The argument above suggests why that reasoning is weak. The overall deficit comes from saving and investment, not from where factories are. Moving production home could change which goods Americans import without changing the total.

It can also give up a great deal. The Why Do We Trade? reading showed that specialization lets people and countries produce more than they could alone. Imports bring lower prices for families, cheaper parts and materials for U.S. manufacturers, wider choice, and the competition that pushes firms to improve. Trade also sends U.S. services, farm goods, aircraft, and machinery to buyers around the world. Judging trade only by the balance misses all of that.

There are serious reasons people give for making more things at home that don’t depend on the trade deficit, such as security and the health of hard-hit communities. The Manufacturing reading weighs those arguments on their own terms.

What Economics Adds

LISTEN The Economics of Tariffs and Trade (with Doug Irwin) on EconTalk, hosted by Russ Roberts; and How Do Tariffs Hurt the Dollar? on the Brookings Podcast on Economic Activity, both with transcripts

Key Terms in Plain Words

Trade deficit

Buying more goods and services from other countries than we sell to them.

Services surplus

Selling more services abroad, such as software or travel, than we buy.

Bilateral deficit

A trade deficit with one particular country.

Balance of payments

The full set of accounts that records all transactions with the rest of the world.

Current account

Trade in goods and services plus income such as interest and dividends.

Financial account

Purchases of assets, such as stocks, bonds, and factories, across borders.

Capital inflow

Money from abroad invested in U.S. assets.

Net international investment position

What Americans own abroad minus what foreigners own here.

National saving

Saving by households and businesses plus government saving.

Saving–investment gap

When a country invests more than it saves, which matches its trade deficit.

Mercantilism

The old idea that a nation grows rich by selling more than it buys.

Saving glut

Bernanke’s term for the rise in saving abroad that flowed to the United States.