The U.S. Trade Deficit: Myths and Realities

Maurice Obstfeld

No 20104, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: A policy priority of the U.S. government is to reduce America’s longstanding trade deficit. Economic planners in the Trump administration blame the postwar world trading system for harming the U.S. economy and hope to change it through wide-ranging tariffs and other measures. Three prominent myths underlie the narrative that the United States has been victimized by trade partners. The first holds that trade liberalization that has left the U.S. open to mercantilist foreign practices is a primary cause of the aggregate U.S. trade deficit. The second is that the dollar’s status as the premier international reserve currency obliges the United States to run trade deficits to supply foreign official holders with dollars. The third is that U.S. deficits are caused entirely by foreign financial inflows that America must accommodate by consuming more than it produces. This paper shows that the realities are more nuanced. While foreign and domestic trade policies can affect both imports and exports separately, they are not principal drivers of their difference, the trade deficit. The U.S. can supply the world with dollars without trade deficits. Finally, the trade deficit reflects the interplay of foreign and U.S. macroeconomic factors (including China’s saving rate and the U.S. government budget deficit) and often U.S. factors are dominant. Higher Federal fiscal deficits, for example, will likely raise U.S. trade deficits despite more import tariffs.

JEL-codes: E44 F32 F33 (search for similar items in EconPapers)
Date: 2025-04
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