Rethinking the U.S. Trade Deficit: Why America’s Economic Blind Spot Begins at Home

By Kaleem Afzal Khan | ImpactWealth.Org

The U.S. trade deficit has long been a political talking point, often painted as a sign of economic weakness or unfair global trade. But is this widespread belief grounded in sound economics—or is it a case of “do-it-yourself economics” gone rogue?

Since the Trump administration’s aggressive tariff policies made headlines, both policymakers and pundits alike have found themselves playing economist. Unfortunately, the conversation has often missed a fundamental truth: America’s trade deficit isn’t the result of foreign trickery—it’s a reflection of domestic financial behavior. Let’s break down what that really means and how it affects long-term economic strategy.

The Trade Deficit: A Primer

America has posted a trade deficit—importing more than it exports—every single year since 1975. In 2023, that number was nearly $773.4 billion, down from a record $945.3 billion in 2022, according to data from the U.S. Bureau of Economic Analysis.

But here’s what most people get wrong: A trade deficit is not inherently bad. And it’s not driven by foreign policy or unfair trade practices.

Rather, it stems from a fundamental equation in macroeconomics: the savings-investment identity.

The Real Driver: America’s Savings Deficiency

At its core, a country’s trade balance equals the difference between what it saves and what it invests. This means:

• If savings > investment, the country has a trade surplus (like China).

• If savings < investment, the country runs a trade deficit (like the U.S.).

U.S. Savings vs. Investment (2023 Estimate)

Source: World Bank & Federal Reserve Economic Data (FRED)

Who’s Actually Saving in the U.S.?

Digging deeper, it’s not that Americans aren’t saving—it’s that public sector spending habits are driving the gap.

• The U.S. private sector actually generates a surplus in savings.

• The government (federal, state, and local), however, runs persistent deficits, eating away at national savings.

Sectoral Balances in the U.S. Economy

Source: Congressional Budget Office (CBO)

Trump’s Trade War: A Misdiagnosis

Former President Trump and his economic advisors often blamed foreign nations—especially China—for the U.S. trade deficit, suggesting that Americans were victims of unfair global practices.

But economists point out two problems with this narrative:

1. The trade deficit is made in the USA. It’s driven by Americans spending and investing more than they save—not foreign manipulation.

2. It’s not necessarily bad. In fact, it can be a sign of economic strength, since foreign investors trust U.S. markets enough to pour in capital.

“Trade deficits reflect a choice: Americans import capital to fund investment and consumption. It’s a trade-off—not a theft,” says Steve H. Hanke, professor of economics at Johns Hopkins University.

Foreign Capital: The Other Side of the Coin

The trade deficit results in a capital account surplus—that is, foreigners buying U.S. assets, from Treasury bonds to real estate.

• It’s a win-win: Americans access low-cost foreign capital to fund growth, while foreign governments find a stable and attractive investment environment.

2023 Foreign Investment in U.S. Assets

Source: U.S. Department of the Treasury

Media Missteps: Do-It-Yourself Economics

Even mainstream media has fallen into the trap. A 2023 New York Times article titled “‘Totally Silly.’ Trump’s Focus on Trade Deficit Bewilders Economists” rightly criticized Trump’s view but failed to articulate the underlying cause: America’s internal savings imbalance.

Without this context, debates over tariffs, trade deals, and reshoring manufacturing miss the mark.

Why This Matters for Investors and Policy Makers

Understanding the true cause of the trade deficit has broad implications:

• For policymakers: Fixing the trade deficit means addressing public sector overspending and increasing national savings—not imposing tariffs.

• For investors: A stable trade deficit signals healthy foreign interest in U.S. markets, making the country an ongoing magnet for global capital.

• For the public: Demonizing trade deficits leads to misguided policies that may backfire economically.

Key Takeaways

• The U.S. trade deficit is a function of domestic behavior, not foreign manipulation.

• The real issue lies in the nation’s savings deficit, especially in the public sector.

• A trade deficit isn’t inherently negative—it often reflects economic confidence and global trust in American financial assets.

• Moving forward, policymakers must focus on increasing national savings—not protectionist policies.

Bottom Line: To solve the trade deficit, America must fix its internal economics—not its trade partners. Understanding the savings-investment identity is a first step toward smarter fiscal and trade policy.

Also read: Trump’s ‘Reciprocal Tariffs’ Under Scrutiny as Economists Dispute Accuracy of Claims

& Ray Dalio Warns of U.S. “Economic Heart Attack” as National Debt Soars Past $36 Trillion