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Everybody is talking about trade deficits but few know how big they are. I will try to remedy that.

I am looking at the import and export of goods and services. The trade surplus is simply the value of imports minus the value of exports. A negative surplus is a deficit.

I am just looking at the total deficit for each country. Economists say this is more relevant to the health of the economy than bilateral trade between just two countries.  A deficit with one country can be cancelled by a surplus with another.

The Deficit Graphs

I divided by GDP in order to see how big the deficits are compared to the economy as a whole.  A half trillion dollar deficit would mean something very different in the USA’s 27 trillion dollar economy than it would in Canada’s 2 trillion dollar economy. I selected 16 out of the top 35 biggest economies. Rather than only take the very largest ones, I also included ones that I thought would be interesting to look at for various reasons.

Here is what I see when I look at the figure:

1. The numbers change a fair bit from year to year. Change over a single year often tells you nothing about the longer term trend. Next year when a bunch of stories only show the change in the deficit from that year to this one, come back to this post and compare.
2. The US deficit has been pretty stable at about 3% for over a decade.
3. Plenty of countries have surpluses, plenty have deficits, and some have had both in recent years. Brazil has changed from one to the other 6 times since 1990.
4. Mexico and Canada have both been running deficits more than surpluses for the last decade.
5. Several countries with low-paid workers that could potentially undercut products from the US and other rich countries actually have pretty big deficits. That includes India, Bangladesh, and the Philipines. On the other hand, Vietnam has grown a pretty big surplus recently.
6. Yes, China, Germany and South Korea have consistently run surpluses.  China’s has been about 2% of their GDP in the last decade
7. Japan has had a deficit for most of the last 15 years! Not enough young people building things?
8. Wow, Russia.

Deficits in Canada and Mexico go against the idea that they are given some kind of export advantage by bordering the US. Australia has a similar economy to Canada in many respects, but unlike Canada it has developed a large trade surplus over the last five years. You could just as well argue that Canada has a more negative balance of trade because it is closer to the US than Australia.

The graphs show that the US deficit is not especially big compared to other countries, and that neither proximity to the US nor a big low-wage work force prevents other countries from having a deficit. 

Imports and Exports

The deficit is just the difference between imports and exports, so what do these look like individually? Here is another set of graphs, same countries as before, and still measuring relative to GDP. From here we see

1. The US and 3 other countries in the group have imports and exports each less than 25% of the whole economy.
2. Mostly imports and exports go up and down together in each country.
3. Many countries have had big increases in trade (relative to the whole economy) over the last 30 years. That inclues rich ones like Germany and Japan, and poorer ones like Mexico and Vietnam.
4. US and especially China have had trade go down more than up since 2010. Canada has been pretty flat.

International trade is important for the US, but it does not dominate our economy the way it does in some smaller countries. While a bunch of countries have seen big increases in exports over the last generation, imports tend to go up in tandem. As we have sedn, this means that rocketing exports does not always mean a rocketing surplus.

Since I’ve done everything relative to GDP, I wondered if there would be a different picture with the actual dollar values. When we look at the dollar value of imports and exports (figure below), we see that they largely track GDP. In other words, the differences in GDP among countries is larger than the differences in the percentages of the economy involved in trade.  Even though imports and exports are a bigger share of the Mexican economy than the US economy, US total imports and exports are a few trillion, whereas for Mexico the numbers are around half a trillion.

What Have We Learned?

For me the most surprising thing about the data was how volatile it is. Total US imports, exports, and deficit are relatively stable, but other countries have seen wild gyrations in both magnitude and sign of their surplus and deficit.   

Another feature you may not heard from recent news coverage: the deficit peaked at above 5% of GDP back around 2005, and has stayed around 3% since 2010. If the trade deficit is bad, it is not getting worse. Both imports and exports as a fraction of the economy are down since 2010 – in the US and in China too.

Is a trade deficit of 3% of GDP good or bad? I do not know. Moreover, I believe that many people who confidently tell me one or the other do not know either. The US mostly had a slight trade surplus for decades before it turned negative. To what extent the trade deficit is an indicator of problems in America’s manufacturing is unclear. The trade deficit increased, and manufacturing employment decreased, when huge amounts of imports from China started arriving around the year 2000.  That does not mean that reducing the trade deficit in the 2020s will increase manufacturing employment. For instance, increases in automation may cut into how many new workers get hired.

Intuitively, if some unit (your household, a state, a country) buys more than it earns, it will need to draw down savings, or borrow money. One thing they can do that looks a bit like borrowing money and a bit like selling something is: they can sell assets, for instance shares of stock in American companies.  While there are sometimes good reasons to borrow money, such as to increase production or to buy weapons to fend off an invading army, it seems dangerous to borrow or sell your property in order to fund consumption.

The idea that you need to borrow to fund a deficit is represente by an equation for trade deficit and capital flows.  This then raises the question of which thing is a cause and which is an effect.  Buying more stuff from China and selling less stuff to the world is an easily understood cause for a deficit. But since the trade deficit equals the amount of loans and investment that comes to the US from abroad, some people say that the deficit is caused by a lack of savings. While some see the deficit as a problem which pulls money out of the country, others see capital flows as a positive development in which the strength of the US economy attracts capital for investment or loans.  In other words, investment opportunities are causing capital flows, which automatically causes a deficit.

It seems to me that the equality between a trade deficit and capital flows does not determine which part affects what. The influence goes both ways.  Also what is described as attractive opportunities to lend money to the US government can also be seen as a consequence of too much deficit spending by the federal government.

President Trump has talked a lot of nonsense about the deficit, implying that every dollar of trade deficit represents a dollar that has been removed from the GDP, and portraying the sale of good to willing buyers in the United States as a malignant rip-off of Americans.  Unfortunately, just because the president thinks something is bad for America, that does not automatically make it good for America.

Technical Note

All the data came from the World Bank data site.  The data in the last figure is based on average from 2019-2023.Another feature you may not heard from recent news coverage: the deficit peaked at above 5% of GDP back around 2005, and has stayed around 3% since 2010. If the trade deficit is bad, it is not getting worse. Both imports and exports as a fraction of the economy are down since 2010 – in the US and in China too.