Updated March 8, 2019
The U.S. Trade Deficit: An Overview
Overview
surplus or deficit in the merchandise trade account is offset
The trade deficit is the numerical difference between a
by a transaction in the financial accounts. In these accounts,
country’s exports and imports of goods and services. The
exports are recorded as a positive amount, because they
United States has experienced annual trade deficits during
represent a credit, while imports are recorded as a negative
most of the post-WWII period. Some observers argue that
amount, because they represent a debt that must be repaid.
the trade deficit costs U.S. jobs, is unsustainable, or reflects
unfair trade practices by foreign competitors. Most
What is the Source of the Trade Deficit?
economists contend this mischaracterizes the nature of the
Given the composition of the U.S. economy, most
trade deficit and the role of trade in the economy. In
economists argue the U.S. trade deficit is the product of
general, most economists conclude the trade deficit stems
U.S. macroeconomic policy. Currently, the demand for
largely from U.S. macroeconomic policies and an
capital in the U.S. economy outstrips the amount of gross
imbalance between saving and investment in the economy.
savings supplied by households, firms, and the government
Economists also conclude that trade creates both economic
sector (a savings-investment imbalance), which pushes up
benefits and costs, but that the long-run net effect on the
domestic interest rates. With floating exchange rates and
economy as a whole is positive. At the same time, some
liberalized capital flows, capital inflows bridge the gap
workers and firms may experience a disproportionate share
between domestic sources of capital and demand, allowing
of short-term adjustment costs. On March 31, 2017,
the country to consume more than it produces, represented
President Trump issued an Executive Order directing key
by the trade deficit. Foreign investors also seek dollar-
agencies to prepare a written report within 90 days (not yet
denominated assets as safe-haven assets during times of
published) on significant trade deficits with U.S. trading
economic stress. The dollar, as a de facto global reserve
partners, including a focus on: unfair trade practices; and
currency, facilitates the trade deficit by broadening the
the impact of the trade deficit on U.S. production,
availability of dollars and dollar-denominate assets.
employment, wages, and national security.
Without this unique role, the United States would have
faced major challenges sustaining trade deficits without
What is the Trade Deficit?
making domestic economic adjustments.
The U.S. merchandise trade deficit is an accounting of the
net balance of exports and imports of goods, one
Foreign demand for dollars and dollar-denominated assets
component of the overall balance of payments. A broader
places upward pressure on the exchange value of the dollar,
measure of U.S. global economic engagement, the current
which raises the cost of U.S. exports and reduces the cost of
account, includes trade in goods, services and some income
imports. As a result, the trade deficit is the offsetting
flows. In 2018, U.S. merchandise exports were $1.67
amount of the capital inflows. Economists argue that
trillion; imports were $2.56 trillion; and the merchandise
attempting to reduce the trade deficit without addressing the
trade deficit was $891 billion on a balance of payments
underlying macroeconomic imbalances could affect the
basis, with a services surplus of $270 billion. Exports
economy negatively in various ways, including but not
account for about 12% of U.S. GDP; imports account for
limited to, reducing the annual rate of growth of the
about 15%. As indicated in Figure 1, the United States
economy and the rate of productivity. Furthermore, most
annually experiences a deficit in goods trade, but a surplus
economists argue that domestic wage rates, the rate of
in services trade.
unemployment, and the overall rate of growth in the
economy are the product of the macroeconomic policy
Figure 1. U.S. Goods and Services Trade, 1999-2018
environment rather than the product of trade generally or
the trade deficit.
Trade Agreements and the Trade Deficit
Some analysts argue that free trade agreements (FTAs)
have contributed to rising trade deficits with some trade
partners. The Trump Administration has indicated that its
first priority in trade relations is lowering or eliminating
bilateral trade deficits. In 2016, the United States ran a
merchandise trade deficit of $71.0 billion with its 20 FTA
partner countries, but a services surplus of around $80.0
billion, or a combined goods and services surplus of about
$9.0 billion. Most economists contend that FTAs are likely
Source: Created by CRS with data from Bureau of the Census.
to affect the composition of trade among trade partners, but
By standard convention, each transaction in the balance of
have little impact on the overall size of the trade deficit,
payments has a corresponding and offsetting transaction: a
given the macroeconomic origins of the trade deficit and
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The U.S. Trade Deficit: An Overview
other factors. Bilateral trade balances can provide a quick
in imports with FTA countries would necessarily result in a
snapshot of the U.S. trade relationship with a particular
loss of employment for the economy.
country, but most economists argue that such balances are
incomplete measures of the comprehensive nature of the
While some imports and exports are substitutable, other
scope of economic engagement between the United States
imports represent items that are not available or are more
and its trading partners.
costly to produce domestically. Also, demands on labor and
Trade agreements generally aim to remove trade barriers
capital markets vary substantially between export and
and determine the rules by which nations conduct trade.
import sectors. While some job losses associated with
They provide incentives to consumers in the form of lower
imports can be highly concentrated, imports also support a
tariff rates and to firms in the form of lower trade barriers,
broad range of widely-dispersed service-sector jobs,
but behavioral characteristics of consumers and firms
including transportation, sales, finance, marketing,
determine how those incentives affect bilateral trade. Also,
insurance, legal, and accounting.
bilateral trade balances are influenced by various and
diverse economic policies and activities among trading
Some observers argue that trade deficits tend to reduce the
partners, including: the overall level of economic
number of jobs and increase the unemployment rate for the
development, the abundance of raw materials, relative rates
economy as a whole. International competition through
of economic growth, formal and informal barriers, and rates
trade is one of a number of factors that affect the overall
of technological change. Also, the growth of cross-border
composition of employment in the economy and may result
trade through complex value chains and intra-firm trade
in job gains and losses. In general, the unemployment rate
challenge traditional concepts of trade and trade balances.
and the trade deficit are related indirectly through the rate
The U.S. International Trade Commission estimated that in
of growth of the economy. In 2009, in the midst of the
2012 U.S. bilateral and regional trade agreements increased
global financial crisis, the U.S. rate of economic growth fell
bilateral trade with partner countries by 26.3%, U.S.
to a negative 3.0%, the rate of unemployment rose to 9.9%,
aggregate trade by about 3%, and U.S. real GDP and U.S.
and the U.S. merchandise trade deficit declined to -$510
employment by less than 1%.
billion as global trade and global economic activity
contracted sharply. In 2006, the U.S. unemployment rate
A broad range of events, such as the 2008-2009 financial
fell to about 4.0%, while the economy grew at an annual
crisis, can affect national economies and trade balances
rate of 2.7%, and it experienced a merchandise trade deficit
overall to a greater degree than even the most robust trade
of over -$800 billion. In 2018, the U.S. rate of
agreement. As a result, most economists question the
unemployment was slightly below 4.0%, while the
usefulness of using bilateral trade balances as indicators of
merchandise trade deficit increased to -$891 billion.
trade relations, the effectiveness of a trade agreement, or
the costs and benefits of a trade agreement. With or without
Issues for Congress
a formal trade agreement, trade with specific countries may
The U.S. trade deficit raises a number of questions for
have a concentrated impact on certain sectors of the
Congress, including:
economy and entail certain adjustment costs, including
changes in employment. These potential costs can be highly
If the trade deficit is the result of U.S. macroeconomic
concentrated, with some workers, firms, and communities
policies, as is generally accepted, what is the best
affected disproportionately. In a dynamic economy such as
approach to reduce that deficit?
the United States, adjustments are constantly taking place
and can occur even in the complete absence of trade.
How much importance should Congress give to
lowering the trade deficit relative to competing policy
Trade Deficit and Unemployment
goals?
Some analysts argue that the trade deficit equates to a net
What is the impact of foreign trade barriers and unfair
loss of jobs in the economy by implying that domestic
trade practices on the trade deficit?
production could be substituted for imports, which
potentially could boost both production and jobs in the U.S.
What role does the trade deficit play relative to other
economy. As the U.S. economy approaches full
domestic factors in determining wages and employment
employment, however, such an increase likely would lead
in the economy?
to rising prices. Most economists argue that equating a trade
More Information
deficit, whether on a bilateral basis or overall, with
unemployment or job losses is questionable given the
CRS In Focus IF10161, International Trade Agreements
macroeconomic origin of the trade deficit and the relatively
and Job Estimates
limited role that trade plays in the overall U.S. economy.
The International Trade Administration (ITA) estimated
CRS Report R44044, U.S. Trade with Free Trade
that in 2016, U.S. exports of goods and services supported
Agreement (FTA) Partners
11.7 million U.S. jobs, or 8% of the U.S. workforce.
CRS Report R45243, Trade Deficits and U.S. Trade Policy
In some cases, various groups have used the ITA estimates
on jobs supported by exports to argue that if a certain
number of jobs were supported by $1 billion of exports,
James K. Jackson, Specialist in International Trade and
then that same number could be used to argue that a certain
Finance
number of jobs would be “lost” by $1 billion of imports,
IF10619
represented by the trade deficit. As a result, any net increase
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The U.S. Trade Deficit: An Overview
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