Are Trade Deficits Inherently Bad?

When the Trump administration imposed significant tariffs and thus additional taxes Americans must pay on many imported goods in April 2025, it justified the move by citing trade deficits with long-time trading partners, including China, the European Union, and Japan. The approach treats bilateral trade deficits—where the U.S. buys more goods from a specific country than it sells to them—as evidence that Americans, in the words of President Donald Trump, are being “ripped off” or providing “subsidies” to other countries.

Like most economists, William D. Lastrapes, professor of economics at the University of Georgia, takes issue with this framing. “International trade deficits are not inherently bad. Trade surpluses are not inherently good,” he told Investopedia. “Imbalances in international trade naturally arise from voluntary exchange across national borders when factors of production in one country have a comparative advantage over factors in another country.”

Understanding Trade Deficits

A trade deficit occurs when a country imports more goods than it exports. A country’s position as a global consumer, its comparative advantages in production, its role in global supply chains, and the strength of its currency all contribute to trade balances.

Countries with trade surpluses, such as China, Russia, and Saudi Arabia, tend to be significant exporters of natural resources that have comparatively low domestic consumption rates. Those, like the U.S., that have a consumption-based economy typically have deficits with such countries. However, few would argue that the U.S. isn’t the far stronger, more diversified economy in these relationships.

In addition, the deficit statistics themselves can be highly misleading. The U.S. runs significant trade surpluses with countries like the Netherlands and Singapore, not because their citizens consume more American products, but because these nations serve as major ports that distribute American goods throughout Europe and Asia.

Similarly, products are now manufactured globally across multiple countries, making country-of-origin designations increasingly arbitrary. For example, a smartphone assembled in Vietnam using Chinese components, Korean displays, American software, and Japanese camera modules might count technically as a Vietnamese export when imported to the U.S., artificially inflating the bilateral deficit with Vietnam. “Economically, the geographic location or nationality of buyer and seller is irrelevant and arbitrary,” Lastrapes said.

The (Mostly) Good and Bad of Trade Deficits

When a country runs a trade deficit, it typically reflects strong consumer purchasing power and robust economic growth. The U.S. has had an impressive economic expansion for decades while simultaneously running trade deficits, demonstrating that the two can coexist (see the charts on this page for U.S. real GDP growth and the U.S. trade balance).

Importantly, trade deficits provide American consumers with lower-priced goods and greater variety. This increases purchasing power, especially for middle- and lower-income households, who benefit from more affordable products. Trade deficits are also counterbalanced by capital account surpluses, meaning foreign countries invest their export earnings (often paid in U.S. dollars) back into the U.S. economy through real estate, businesses, stocks, bonds, and other investments. This influx of foreign capital helps fund American business expansion, reduces interest rates, and supports economic growth. 

“U.S. trade deficits caused by profitable opportunities for investment in the U.S. allow wealth to grow without sacrificing current spending,” Lastrapes said. “Growth in productive capacity means that more goods can be produced—and sold to other countries—in the future.” In short, trade deficits can serve as a form of savings for future production.

While economists generally view specific trade deficits as peripheral, communities previously dependent on manufacturing have experienced significant economic disruption as production shifted overseas, leading to very real social and economic hardships for affected workers and regions. However, most economists maintain that these concerns, while valid, are better addressed through targeted policies rather than broad tariffs aimed at eliminating trade deficits entirely.

The Bottom Line

In today’s global economy, trade deficits indicate that the U.S. has been an attractive destination for both consumer goods and investment capital. “International trade is fundamentally no different than any voluntary trade, except that it takes place across politically or historically determined, and therefore, economically irrelevant, international borders,” Lastrapes said.

Thus, there is little correlation between a country’s specific trade deficits and its overall economic performance.