Behind President Trump’s decision to hit some of America’s largest trading partners with stiff tariffs is his fixation on the trade deficit that the United States runs with other nations. But many economists say that is a poor metric for judging the quality of a trade relationship.
The steep tariffs, which went into effect on nearly 60 trading partners on Wednesday, were calculated based on bilateral trade deficits, or the gap between what the United States sells to each country and what it buys.
Mr. Trump has long viewed that gap as evidence that America is being “ripped off” by other countries. He argues that other countries’ unfair behavior has made trade so skewed and that the United States needs to be able to manufacture more of what it consumes. With his newest round of tariffs, the president declared the U.S. trade deficit to be a national emergency, giving him the power to immediately impose tariffs.
But economists argue this is a flawed way to approach the issue, given that bilateral trade deficits crop up for many reasons beyond unfair practices.
“It’s totally silly,” Dani Rodrik, an economist who studies globalization at Harvard University, said of Mr. Trump’s focus on bilateral deficits. “There’s no other way to say it, it makes no sense.”
Some economists do agree with the Trump administration that America’s overall trade deficit with the rest of the world reflects a problem for the U.S. economy, because the United States is so dependent on manufacturing elsewhere, including in China. The U.S. trade deficit hit a record $1.2 trillion last year, as imports surged. But others don’t see it as an issue. And nearly all economists say that focusing on imbalances from country to country can be highly misleading.
Last year, for example, the United States ran bilateral trade surpluses with 116 countries globally. It ran bilateral trade deficits with 114 countries, according to World Bank data.
Often these relationships just follow the flow of trade, without suggesting much about a country’s trade practices overall. Matthew Klein, who writes about economics for The Overshoot, points out that the United States runs a trade surplus with Australia because it sends out lots of machinery, transportation equipment and chemicals. Australia runs a trade surplus with China, sending it iron ore, natural gas and gold. And China runs a trade surplus with the United States by sending it car parts, electronics and batteries.
The United States also has substantial trade surpluses with the Netherlands and Singapore, Mr. Klein pointed out. But that’s not because Dutch and Singaporean people consume so many more American products than other nations.
It’s because those countries are home to major ports that import American goods. The Netherlands unloads U.S. goods in its ports and sends them throughout Europe to other consumers, while Singapore does something similar for Asia. But the trade balance is calculated based on the country the good reaches first, not its ultimate destination.
Economists have also criticized Mr. Trump’s tariffs for targeting all foreign trade flows indiscriminately, without regard for how strategic the good is to the United States or even whether the country can actually make it.
Mr. Trump’s focus on bilateral trade deficits has meant that even close U.S. allies like Canada, Mexico and Europe are considered enemies when it comes to trade, because they sell the United States more than they buy.
Switzerland also ended up with high tariffs, in part because the country exports a lot of gold to the United States, as did tiny Lesotho, where the average annual income is $3,500. Lesotho received preferential trade treatment under legislation passed in 2000 and now makes bluejeans for Americans.
Mr. Trump’s tariffs are calculated by a simple formula, which boils down to dividing the trade deficit the U.S. runs with each country by the value of goods the U.S. imports from it. That formula means that, until U.S. imports from and exports to every country balance out, other countries will face additional tariffs, whether the nation provides the United States with advanced technology, toys, cocoa beans or corn.
The calculation ignores the idea that some countries might be better at making certain products than others, or that importing certain products could benefit Americans. It also excludes data on any trade in services — like financial services, tourism and education — which is the segment of the economy in which most Americans work.
Mary Lovely, a senior fellow at the Peterson Institute for International Economics, said the formula “gives a gloss of science to what is essentially a made-up approach.” The formula makes several wildly unrealistic assumptions, she says, including that U.S. consumer demand responds similarly to all imports.
That response “cannot possibly be the same for all goods from all countries,” she said. “How will U.S. supply respond to higher tariffs on cocoa and natural rubber from Cote d’Ivoire? The same way it responds to higher tariffs on machinery from Europe?”
Mr. Trump’s advisers have defended his methodology. Stephen Miran, the chair of the White House Council of Economic Advisers, said in an interview that the president had been “clear for decades that he thinks that bilateral trade deficits are a major problem for Americans.”
Mr. Miran argued that the trade deficit could be a “proxy for the totality of economic policies that cause persistent trade deficits.” The Trump administration did a lot of analysis of the situation, he said, and the president decided that the approach “was the fairest course for American workers.”
In testimony before Congress on Wednesday, Jamieson Greer, the U.S. trade representative, pointed to discriminatory policies in places like the European Union, Brazil and India that had resulted in growing trade deficits. He said the U.S. trade deficit was “driven by these non-reciprocal conditions” and called it “a manifestation of the loss of the nation’s ability to make, to grow and to build.”
“It’s dangerous, and the president recognizes the urgency of the moment,” Mr. Greer says.
The administration also seems to view the focus on bilateral trade deficits as a way to get at the fact that goods from China appear to have been routed through other countries and on to the United States. After Mr. Trump imposed tariffs on China in his first term, many factories moved outside China to avoid the tariffs, but continued to rely on Chinese parts, raw materials and technology.
With Mr. Trump’s new tariff formula, countries that have been the destination for these factories and have had their trade surpluses with the United States balloon in recent years will be hit hard.
“Because the global economy is now so integrated, countries have been able to move goods through third counties to get into our market,” said Mark DiPlacido, a policy adviser at American Compass, a conservative economic think tank. As the U.S. bilateral trade deficit with China has decreased, the deficit with other Southeast Asian countries has increased, he said.
“So it’s not enough to just target China anymore,” he said. “There just needs to be this global base line if we’re going to see the overall trade deficit decrease.”
The Trump administration is probably right that, in some cases, barriers to trade that foreign countries set up have lowered the amount that the United States exports to those places and exacerbated trade deficits.
And many countries, particularly in Asia, have subsidized their manufacturing industries in ways that allow them to sell goods at much lower prices, making U.S. production of the same goods uneconomical and causing U.S. trade deficits with those countries to balloon.
Michael Pettis, a professor of finance at Peking University in Beijing who studies the topic, said the new tariffs might reroute the way trade moves through certain countries, but still not do much to change the size of the overall trade deficit the United States runs with the world.
“They’re focusing on the wrong problem, bilateral deficits,” Mr. Pettis said.
Mr. Pettis sees the overall trade deficit that the United States runs with the world as a problem for the American economy because it means that U.S. consumer demand for goods supports manufacturing activity elsewhere, like in China, rather than in the United States.
But he insists that the trade imbalances the United States has individually with other countries are not always reflective of that problem, and that tariffs won’t necessarily do much to fix it.
In his view, government policies in places like China, Germany, South Korea and Taiwan are driving major trade surpluses. Because every trade surplus needs a deficit to balance it, that ends up inflating the U.S. trade deficit. Without bigger economic changes in China and other countries, these problems will still persist, he argues.
“There is a serious problem,” he said. “We’re not seeing the best solution to that problem.”
Other economists still dispute the idea that running an overall trade deficit with the rest of the world is an issue for the United States. Other factors, like U.S. government spending and investment flows, are the ultimate driver of the U.S. trade deficit, not demand for goods, some economists argue. And they say that, if Mr. Trump’s tariffs do reduce the overall trade deficit, it will more likely be because they tanked the U.S. economy or drove investors away from the United States by sapping the world’s confidence in the U.S. dollar and its markets.
Mr. Rodrik, the Harvard economist, said there was “absolutely no relationship between a country’s trade deficit and how well it’s doing.” He pointed out that both Venezuela and Russia run trade surpluses. “Does the United States really want to be a Venezuela or a Russia?”
