Myth 6: Our $566 Billion Trade Deficit Reduces the Size of Our Economy

This is the sixth installment in a holiday-themed series aimed at correcting common misconceptions about trade. Each day until Christmas, economists Christine McDaniel and Veronique de Rugy will address a new claim about trade or tariffs while providing additional resources for those interested in learning more about the topic.

Myth: Our $566 Billion Trade Deficit Reduces the Size of Our Economy 

Be merry because this common tale isn’t true! Every single one of us will soon be running a few trade deficits with the stores where we will shop for Christmas, but we won’t be worse off for it because in exchange for the money we spend we are enriched by the gifts we have picked for our loved ones. The same is true with the trade deficit. Yes, we buy more stuff from foreigners than foreigners buy from us. But foreigners invest more money in our economy than we invest in theirs. Every single American dollar that we spend on imports shows up back in America by foreigners purchasing American exports, investing their dollars here, or lending their dollars to Uncle Sam (buying US Treasuries), thus keeping interest rates here low. It’s a Christmas miracle!

Suggested Resources

1. “Plumbing America’s Balance of Trade,” Daniel Griswold, Mercatus Center at George Mason University
2. “Three Ways to Reduce a Trade Deficit,” Caroline Freund, Peterson Institute for International Economics
3. “Do Import Tariffs Help Reduce Trade Deficits?” Mary Amiti, Mi Dai, Robert Feenstra, and John Romalis, Liberty Street Economics