What to know about trade deficits

Jill on Money

After the U.S. imposed previously announced tariffs (25 percent on steel and 10 percent on aluminum) on the European Union, Canada and Mexico last month, a number of you wrote to me and asked me to explain the bottom line when it comes to trade deficits.

I know that the rhetoric around trade has been tough to absorb, so here’s my attempt to provide some simple trade answers.

What is a trade deficit? A trade deficit occurs when a nation imports more than it exports. For instance, in 2017, the United States imported a record $2.9 trillion dollars worth of goods and services, while it exported $2.3 trillion, which amounted to a trade deficit of $566 billion dollars in goods and services, the highest trade deficit since 2008.

What does the U.S. import? There are billions of categories of what comes into the country, but it is mostly capital goods, like computers and telecom equipment; consumer goodies, like apparel, electronic devices, and automobiles; and crude oil.

What does the U.S. export? The U.S. economy is driven primarily by services, such as tourism, intellectual property, education and finance, which make up roughly one-third of exports. But the U.S. also exports aircraft, medical equipment, refined petroleum and agricultural commodities.

What’s the breakdown of goods vs. services? The U.S. deficit in goods stands at $810 billion, while there was a $244 billion surplus in services.

Why is the U.S. trade deficit increasing? During good economic times, companies and consumers spend more, especially on products made overseas. Strange as it may seem, the Trump administration’s own tax policy may be contributing to the current trade deficit, because those cuts have led to more spending, more imports and less savings. Additionally, the strengthening U.S. economy has led to higher interest rates, which makes foreign investors more eager to place their money in the United States — another contributing factor to the deficit.

Are trade deficits bad? Although Commerce Secretary Wilbur Ross said that trade deficits “weaken our economy,” economists say that it is not the case that deficits mean the U.S. loses; nor do surpluses mean the U.S. wins. Imports have no effect on GDP, positive or negative, and most economists say that trade boosts the overall economy by lowering prices and increasing productivity.

With which country does the U.S. have the biggest trade deficit? China is at the top of the list, according to the U.S. Census Bureau. In 2017, the value of Chinese goods imported to the U.S. exceeded American goods exports to China by roughly $375 billion. Over that same period, the United States ran a $38.5 billion surplus on services trade with China. That means overall, in terms of both goods and services, the U.S. trade deficit with China was around $336 billion. The next largest is the European Union, with a total trade deficit of $101 billion.

With which country does the U.S. have the biggest trade surplus? The U.S. had a surplus with six of the 15 major trading partners that the Census Bureau tracked in 2017. The largest trade surplus in 2017 was with Hong Kong (nearly $35 billion). Following closely behind were Brazil ($28 billion), Singapore ($20 billion) and the United Kingdom ($14 billion).

Jill Schlesinger, CFP, is a CBS News Business Analyst. She welcomes comments and questions at askjill@jillonmoney.com.