Trade Deficits Are Good
6th April 2025
When we buy more goods and services from a foreign country than they buy from us in a given time period, we have a trade deficit with them. That means we are sending them little pieces of green paper (or more usually, digital bits) that represent a future claim on wealth. They can’t eat the green paper or the digital bits (i.e. dollars). They can’t build anything with them. We are getting valuable products in exchange for a future promise. Thus we can consume more now than we would in the absence of a trade deficit.
What do the recipient countries do with the pieces of green paper or digital bits? Since the dollar is the world’s reserve currency, they often use them to purchase goods and services from another country. So Taiwan might give us advanced semiconductors in exchange for digital bits and then pass the digital bits on to Saudi Arabia for oil. Then Saudi Arabia might use them to buy petroleum engineering services from the US, at which time we would be obligated to make good on the promise we made to Taiwan that those digital bits would be worth something. Because dollars flow around the globe, our trade deficit with a particular country is of no concern to us.
Our overall trade deficit is a good thing because it allows us to consume more goods and services now. Even better: because we have the world’s reserve currency, many of these dollars circulate overseas and have not yet (and may never be) used to demand goods and services from us. In 2022 the St. Louis Fed estimated that $1.1 trillion in Federal Reserve banknotes were held overseas. This does NOT include the vast amounts of digital currency held overseas. So foreigners have given us goods worth $1.1 trillion in exchange for banknotes alone. And they are holding them as a store of value and a means of exchange. They have yet to ask us to give them any goods or services in exchange for those banknotes.
A point that I have made several times on this very blog.