“The Trade Deficit Isn’t an Emergency—It’s a Sign of America’s Strength,” Writes BU Economist

“The Trade Deficit Isn’t an Emergency—It’s a Sign of America’s Strength,” Writes BU Economist

Tarek Alexander Hassan says the US trade deficit shows the country’s financial and technological ascendancy and that high tariffs may erode pillars of American economic dominance

“A trade deficit can only arise if foreigners invest more in the US than Americans invest abroad,” writes Tarek Alexander Hassan, a BU College of Arts & Sciences professor of economics. Photo via Unsplash/CHUTTERSNAP

When US President Donald Trump imposed sweeping new tariffs on imported goods on April 2, 2025—upending global trade and sending markets into a tailspin—he presented the move as a response to a crisis. In an executive order released the same day, the White House said the move was necessary to address “the national emergency posed by the large and persistent trade deficit.”

A trade deficit—when a country imports more than it exports—is often viewed as a problem. And yes, the US trade deficit is both large and persistent. Yet, as an economist who has taught international finance at Boston University, the University of Chicago, and Harvard [University], I maintain that, far from a national emergency, this persistent deficit is actually a sign of America’s financial and technological dominance.

The Trade Deficit Is the Flip Side of an Investment Magnet

A trade deficit sounds bad, but it is neither good nor bad.

It doesn’t mean the US is losing money. It simply means foreigners are sending the US more goods than the US is sending them. America is getting more cheap goods, and in return it is giving foreigners financial assets: dollars issued by the Federal Reserve, bonds from the US government and American corporations, and stocks in newly created firms.

That is, a trade deficit can only arise if foreigners invest more in the US than Americans invest abroad. In other words, a country can only have a trade deficit if it also has an equally sized investment surplus. The US is able to sustain a large trade deficit because so many foreigners are eager to invest here.

Why? One major reason is the safety of the US dollar. Around the world, from large corporations to ordinary households, the dollar is used for saving, trading, and settling debts. As the world economy grows, so does foreigners’ demand for dollars and dollar-denominated assets, from cash to Treasury bills and corporate bonds.

Because the dollar is so attractive, the Federal Reserve gets to mint extra cash for use abroad, and the US government and American employers and families can borrow money at lower interest rates. Foreigners eagerly buy these US financial assets, which enables Americans to consume and invest more than they ordinarily could. In return for our financial assets, we buy more German machines, Scotch whisky, Chinese smartphones, Mexican steel, and so on.

Blaming foreigners for the trade deficit, therefore, is like blaming the bank for charging a low interest rate. We have a trade deficit because foreigners willingly charge us low interest rates—and we choose to spend that credit.

US Entrepreneurship Attracts Global Capital—and Fuels the Deficit

Another reason for foreigners’ steady demand for US assets is American technological dominance: When aspiring entrepreneurs from around the world start new companies, they often decide to do so in Silicon Valley. Foreigners want to buy stocks and bonds in these new companies, again adding to the US investment surplus.

This strong demand for US assets also explains why Trump’s last trade war in 2018 did little to close the trade deficit: Tariffs, by themselves, do nothing to reduce foreigners’ demand for US dollars, stocks, and bonds. If the investment surplus doesn’t change, the trade deficit cannot change. Instead, the US dollar just appreciates, so that imports get cheaper, undoing the effect of the tariff on the size of the trade deficit. This is basic economics: You can’t have an investment surplus and a trade surplus at the same time, which is why it’s silly to call for both.

It’s worth noting that no other country in the world enjoys a similarly sized investment surplus. If a normal country with a normal currency tries to print more money or issues more debt, its currency depreciates until its investment account—and its trade balance—goes back to something close to zero. America’s financial and technological dominance allows it to escape this dynamic.

That doesn’t mean all tariffs are bad or all trade is automatically good. But it does mean that the US trade deficit, poorly named though it is, does not signify failure. It is, instead, the consequence—and the privilege—of outsized American global influence.

The president’s frenzied attacks on the nation’s trade deficit show he’s misreading a sign of American economic strength as a weakness. If the president really wants to eliminate the trade deficit, his best option is to rein in the federal budget deficit, which would naturally reduce capital inflows by raising domestic savings.

Rather than reviving US manufacturing, Trump’s extreme tariffs and erratic foreign policy are likely to instead scare off foreign investors altogether and undercut the dollar’s global role. That would indeed shrink the trade deficit—but only by eroding the very pillars of the country’s economic dominance, at a steep cost to American firms and families.

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Tarek Alexander Hassan is a Boston University College of Arts & Sciences professor of economics. He studies international finance, macrofinance, and social factors in economic growth, and is a research fellow at the National Bureau of Economic Research and at the Centre for Economic Policy Research.

“Expert Take” is a research-led opinion page that provides commentaries from BU researchers on a variety of issues—local, national, or international—related to their work. Anyone interested in submitting a piece should contact thebrink@bu.edu. The Brink reserves the right to reject or edit submissions. The views expressed are solely those of the author and are not intended to represent the views of Boston University.

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