The U.S. Trade Deficit: An Overview

The U.S. Trade Deficit: An Overview

Updated December 9, 2020
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.
the country to consume more than it produces, represented
by the trade deficit. Foreign investors also seek dollar-
What is the Trade Deficit?
denominated assets as safe-haven assets during times of
The U.S. merchandise trade deficit is an accounting of the
economic stress. The dollar, as a de facto global reserve
net balance of exports and imports of goods, one
currency, facilitates the trade deficit by broadening the
component of the overall balance of payments. A broader
availability of dollars and dollar-denominate assets.
measure of U.S. global economic engagement, the current
Without this unique role, the United States would have
account, includes trade in goods, services and some income
faced major challenges sustaining trade deficits without
flows. In 2019, U.S. merchandise exports were $1.65
making domestic economic adjustments.
trillion; imports were $2.52 trillion; and the merchandise
trade deficit was $864 billion on a balance of payments
Foreign demand for dollars and dollar-denominated assets
basis, with a services surplus of $287 billion, as indicated in
places upward pressure on the exchange value of the dollar,
Figure 1. Through October 2020, merchandise goods
which raises the cost of U.S. exports and reduces the cost of
exports were recorded at $1.2 trillion, merchandise imports
imports. As a result, the trade deficit is the offsetting
were $1.9 trillion for a goods deficit of $738 billion,
amount of the capital inflows. Economists argue that
slightly above the $729 billion recorded for the same period
attempting to reduce the trade deficit without addressing the
in 2019. Services exports were $585 billion, while services
underlying macroeconomic imbalances could affect the
imports were $383, for a surplus of $202 billion, also below
economy negatively in various ways, including but not
the surplus of $239 billion recorded in the first 10 months
limited to, reducing the annual rate of growth of the
of 2019. Exports account for about 12% of U.S. GDP;
economy and the rate of productivity. Furthermore, most
imports account for about 15%. The United States annually
economists argue that domestic wage rates, the rate of
experiences a deficit in goods trade, but a surplus in
unemployment, and the overall rate of growth in the
services trade.
economy are the product of the macroeconomic policy
environment rather than the product of trade generally or
Figure 1. U.S. Goods and Services Trade, 1999-2019
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
Source: Created by CRS with data from Bureau of the Census.
$9.0 billion. Most economists contend that FTAs are likely
to affect the composition of trade among trade partners,
By standard convention, each transaction in the balance of
primarily through trade diversion, but have little impact on
payments has a corresponding and offsetting transaction: a
the overall size of the trade deficit, given the
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The U.S. Trade Deficit: An Overview
macroeconomic origins of the trade deficit and other
number of jobs would be “lost” by $1 billion of imports,
factors. Bilateral trade balances can provide a quick
represented by the trade deficit. As a result, any net increase
snapshot of the U.S. trade relationship with a particular
in imports with FTA countries would necessarily result in a
country, but most economists argue that such balances are
loss of employment for the economy.
incomplete measures of the comprehensive nature of the
scope of economic engagement between the United States
While some imports and exports are substitutable, other
and its trading partners.
imports represent items that are not available or are more
Trade agreements generally aim to remove trade barriers
costly to produce domestically. Also, demands on labor and
and determine the rules by which nations conduct trade.
capital markets vary substantially between export and
They provide incentives to consumers in the form of lower
import sectors. While some job losses associated with
tariff rates and to firms in the form of lower trade barriers,
imports can be highly concentrated, imports also support a
but behavioral characteristics of consumers and firms
broad range of widely-dispersed service-sector jobs,
determine how those incentives affect bilateral trade. Also,
including transportation, sales, finance, marketing,
bilateral trade balances are influenced by various and
insurance, legal, and accounting.
diverse economic policies and activities among trading
partners, including: the overall level of economic
Some observers argue that trade deficits tend to reduce the
development, the abundance of raw materials, relative rates
number of jobs and increase the unemployment rate for the
of economic growth, formal and informal barriers, and rates
economy as a whole. International competition through
of technological change. Also, the growth of cross-border
trade is one of a number of factors that affect the overall
trade through complex value chains and intra-firm trade
composition of employment in the economy and may result
challenge traditional concepts of trade and trade balances.
in job gains and losses. In general, the unemployment rate
The U.S. International Trade Commission estimated that in
and the trade deficit are related indirectly through the rate
2012 U.S. bilateral and regional trade agreements increased
of growth of the economy. In 2009, in the midst of the
bilateral trade with partner countries by 26.3%, U.S.
global financial crisis, the U.S. rate of economic growth fell
aggregate trade by about 3%, and U.S. real GDP and U.S.
to a negative 3.0%, the rate of unemployment rose to 9.9%,
employment by less than 1%.
and the U.S. merchandise trade deficit declined to -$510
billion as global trade and global economic activity
A broad range of events, such as the 2008-2009 financial
contracted sharply. In 2006, the U.S. unemployment rate
crisis and the 2020 pandemic shutdown, can affect national
fell to about 4.0%, while the economy grew at an annual
economies and trade balances overall to a greater degree
rate of 2.7%, and it experienced a merchandise trade deficit
than even the most robust trade agreement. As a result,
of over -$800 billion. In 2018, the U.S. rate of
most economists question the usefulness of using bilateral
unemployment was around 3.5%, while the merchandise
trade balances as indicators of trade relations, the
trade deficit increased to -$887 billion from -$805 billion in
effectiveness of a trade agreement, or the costs and benefits
2017.
of a trade agreement. With or without a formal trade
agreement, trade with specific countries may have a
Issues for Congress
concentrated impact on certain sectors of the economy and
The U.S. trade deficit raises a number of questions for
entail certain adjustment costs, including changes in
Congress, including:
employment. These potential costs can be highly
concentrated, with some workers, firms, and communities
 If the trade deficit is the result of U.S. macroeconomic
affected disproportionately. In a dynamic economy such as
policies, as is generally accepted, what is the best
the United States, adjustments are constantly taking place
approach to reduce that deficit?
and can occur even in the complete absence of trade.
 How much importance should Congress give to
Trade Deficit and Unemployment
lowering the trade deficit relative to competing policy
Some analysts argue that the trade deficit equates to a net
goals?
loss of jobs in the economy by implying that domestic
 What is the impact of foreign trade barriers and unfair
production could be substituted for imports, which
trade practices on the trade deficit?
potentially could boost both production and jobs in the U.S.
economy. As the U.S. economy approaches full
 What role does the trade deficit play relative to other
employment, however, such an increase likely would lead
domestic factors in determining wages and employment
to rising prices. Most economists argue that equating a trade
in the economy?
deficit, whether on a bilateral basis or overall, with

More Information
unemployment or job losses is questionable given the
macroeconomic origin of the trade deficit and the relatively
CRS In Focus IF10161, International Trade Agreements
limited role that trade plays in the overall U.S. economy.
and Job Estimates
The International Trade Administration (ITA) estimated
that in 2016, U.S. exports of goods and services supported
CRS Report R44044, U.S. Trade with Free Trade
11.7 million U.S. jobs, or 8% of the U.S. workforce.
Agreement (FTA) Partners
In some cases, various groups have used the ITA estimates
CRS Report R45243, Trade Deficits and U.S. Trade Policy
on jobs supported by exports to argue that if a certain
number of jobs were supported by $1 billion of exports,
then that same number could be used to argue that a certain
James K. Jackson, Specialist in International Trade and
Finance
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The U.S. Trade Deficit: An Overview

IF10619

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