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Economic Viewpoint

The US Trade Deficit: Who’s Really “Subsidizing” Whom?

January 22, 2025
Hendrix Vachon
Principal Economist

Donald Trump is fond of repeating that the United States “subsidizes” Canada and other countries, alluding to the country’s trade deficits. Let’s be clear: The United States isn’t handing money out to Canada or to any other nation. A trade deficit isn’t a subsidy. The United States is simply buying foreign products at market price. But let’s say we decided to take a page from Trump’s rhetorical playbook. We could argue, theoretically, that the rest of the world is actually “subsidizing” the United States. How so? Because trade deficits require foreign capital inflows. Foreign investment isn’t technically a subsidy either, but it’s true that the United States relies heavily on money from other countries.

 

In this Economic Viewpoint, we’ll be examining the macroeconomic factors underlying trade deficits, using the balance of payments framework—a summary of how trade and capital flow between countries. Trade deficits are inextricably linked to consumer spending, investments, and government deficits. In reality, the United States won’t really be able to reduce its trade deficit unless it also chooses to reduce one of these three components. That’s a hard decision under any circumstances, and certain countries could choose to add to the pressure by restricting US access to capital. At that point, we’d no longer be talking about a trade war, but rather a capital war.

NOTE TO READERS: The letters k, M and B are used in texts, graphs and tables to refer to thousands, millions and billions respectively. IMPORTANT: This document is based on public information and may under no circumstances be used or construed as a commitment by Desjardins Group. While the information provided has been determined on the basis of data obtained from sources that are deemed to be reliable, Desjardins Group in no way warrants that the information is accurate or complete. The document is provided solely for information purposes and does not constitute an offer or solicitation for purchase or sale. Desjardins Group takes no responsibility for the consequences of any decision whatsoever made on the basis of the data contained herein and does not hereby undertake to provide any advice, notably in the area of investment services. Data on prices and margins is provided for information purposes and may be modified at any time based on such factors as market conditions. The past performances and projections expressed herein are no guarantee of future performance. Unless otherwise indicated, the opinions and forecasts contained herein are those of the document’s authors and do not represent the opinions of any other person or the official position of Desjardins Group.