False Fear Review: America’s Trade Deficit

Does America have a trade deficit problem? US imports jumped more than exports in November—widening the gap between them to $78.2 billion.^[i] Many see this “deficit” as a negative, suggesting a flood of imports crowds out domestically produced goods, harming businesses, workers and economic growth. But this is a common misperception: In our view, America’s large and growing trade deficit doesn’t threaten economic growth nor stocks.

Many believe America’s massive trade deficit is objectively bad. The primary gripes? Importing more means producing less here and exporting more jobs overseas. This is why US politicians depict it as a “giant sucking sound,” signifying foreign economies vacuuming away US jobs. Skeptics also claim a large trade deficit makes America reliant on other nations and subjects homegrown businesses to potentially unfair competition.

While overseas trade can cause some negative outcomes, it is easy to overstate this and miss the benefits. For one, imports create myriad jobs here. Numerous domestic industries rely on them! Heck, most American manufacturing uses imported components or raw materials—things like metallic abrasives, steel, sand and gravel from places like Canada, Mexico and Brazil. In today’s highly globalized world, there simply aren’t many goods made soup-to-nuts in any one country. The more advanced a country’s manufacturing is—and the US has some of the most advanced manufacturing around—the more it likely relies on imports of more rudimentary inputs.

Plus, scads of US jobs focus on selling and servicing products manufactured elsewhere. Yes, there are port workers and others involved in trade directly. But also, think auto dealerships and repair shops that specialize in European, Japanese or Korean cars. Or even American cars! Virtually no US-built auto is 100% American or even very close. Or washing machine service techs, TV repair people, clothing retailers, the specialists that maintain complex industrial machinery, or, or, or.

Another positive? Trade deficits translate into foreign investment surpluses. Foreign companies receive US dollars selling us goods, then many invest those dollars here instead of converting them to their home currency and repatriating them. Thus, the final product—foreign investment—adds to domestic growth. Not by just parking cash in Treasury bonds and/or real estate trophies, but investing in things that add to the real economy—factories, stores, infrastructure, research and development. This creates jobs.

Rising imports can also signal strong domestic demand. Consider: The trade deficit typically narrows during recessions—like in 2001 and 2009.^[ii] By contrast, the deficit usually widens or stays flat during expansionary periods, as consumption and investment grow.^[iii] Just stop and take a long-term view: The US has run a trade deficit since mid-1970s—an increasingly large one, too—yet GDP has grown leaps and bounds since.^[iv]

We think total trade—exports plus imports—is a better metric of cross-border economic activity. Since imports and exports roughly signal domestic and foreign demand, respectively, they help show how economies—at home and abroad—are doing. For example, America’s economy fell into a sharp recession during 2007 – 2009’s global financial crisis. Total trade tumbled, with imports falling from Q3 2008 through Q1 2009.^[v] But over the same stretch, economies less affected by the crisis—including some key US trade partners—didn’t experience such a demand drag.^[vi] Hence, US exports fell much more slowly and the deficit shrank by more than -$40 billion.^[vii] Was this … good for America’s economy? No. Total trade revealed a much clearer view.

Recoveries can show the flipside: The US trade deficit nearly doubled from April 2020 – March 2022 as America’s economy rapidly rebounded from pandemic-era lockdowns and supply chain disruptions.^[viii] Was this … bad? We don’t think so. Total trade over this span rose 68.3%, again delivering a more accurate reflection.^[ix]

While the trade deficit counts imports as a negative, we think total trade offers a clearer view of their economic effects. Importantly, it doesn’t presume falling imports are an unalloyed good. Consider the 1970s’ oil embargo—the US couldn’t import enough oil and it proved poor for the economy.

Some argue the trade deficit is bad because it represents things that should be made in America, boosting growth and jobs here. Fair enough. But a couple thoughts: First, creating more finalized products here still requires more imported components and resources—as we noted earlier, tons of American businesses rely on them. Second, what is the opportunity cost? The US has evolved over time to become much more services- and knowledge-based, which is the standard course of economic development. Even US manufacturing is highly advanced. “Reshoring” less-advanced manufacturing could redirect workers out of higher-paying and more productive industries and roles.

Moreover, even if you can produce something locally doesn’t mean it is practical to. For example, the US imports tons of oil—despite being the world’s top producer—because US refineries aren’t equipped to process the light, sweet crude America’s vast shale reserves deliver. US refineries are set up primarily for heavy crude. Switching those up is an enormous cost to businesses. Instead, America exports light sweet crude to countries equipped to refine it and imports heavier crude (from Canada, for example) to refine. Everyone wins. This is just one example of comparative advantage in trade. Then, too, the US can’t increase industrial capacity overnight. New facilities require high up-front investment and can take years, in some cases, to come online. And that is before you consider the morass of red tape that can block or delay breaking ground.

Keep all of these things in mind next time headlines stress imports’ topping exports or the trade deficit more generally. We don’t think America’s trade deficit should worry investors. The economy has grown hugely with it, and for the many publicly traded US stocks reliant on imports, it is a plus, in our view. Not a minus.