- Hendrix Vachon
Principal Economist
The US Trade Deficit: Who’s Really “Subsidizing” Whom?
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.