Daniel Griswold explained this clearly nearly 20 years ago:
The most important economic truth to grasp about the U.S. trade deficit is that it has virtually nothing to do with trade policy. A nation’s trade deficit is determined by the flow of investment funds into or out of the country. And those flows are determined by how much the people of a nation save and invest - two variables that are only marginally affected by trade policy.
An understanding of the trade deficit begins with the balance of payments, the broadest accounting of a nation’s international transactions. By definition, the balance of payments always equals zero - that is, what a country buys or gives away in the global market must equal what it sells or receives - because of the exchange nature of trade. People, whether trading across a street or across an ocean, will generally not give up something without receiving something of comparable value in return. The double-entry nature of international bookkeeping means that, for a nation as a whole, the value of what it gives to the rest of the world will be matched by the value of what it receives.
The balance of payments accounts capture two sides of an equation: the current account and the capital account. The current account side of the ledger covers the flow of goods, services, investment income, and uncompensated transfers such as foreign aid and remittances across borders by private citizens. Within the current account, the trade balance includes goods and services only, and the merchandise trade balance reflects goods only. On the other side, the capital account includes the buying and selling of investment assets such as real estate, stocks, bonds, and government securities.
If a country runs a capital account surplus of $100 billion, it will run a current account deficit of $100 billion to balance its payments. As economist Douglas Irwin explains, “If a country is buying more goods and services from the rest of the world than it is selling, the country must also be selling more assets to the rest of the world than it is buying.”
The necessary balance between the current account and the capital account implies a direct connection between the trade balance on the one hand and the savings and investment balance on the other. That relationship is captured in the simple formula:
Savings - Investment = Exports - Imports
Thus, a nation that saves more than it invests, such as Japan, will export its excess savings in the form of net foreign investment. In other words, it must run a capital account deficit. The money sent abroad as investment will return to the country as payments for its exports, which will be in excess of what the country imports, creating a corresponding trade surplus. A nation that invests more than it saves - the United States, for example - must import capital from abroad. In other words, it must run a capital account surplus. The imported capital allows the nation’s citizens to consume more goods and services than they produce, importing the difference through a trade deficit.
Thus, Trump, who has this great concern about the trade deficit (unjustified), demonstrates his total cluelessness by hailing the announcement by Masa (SoftBank) of Japan that they plan to invest $US50 billion in the U.S. which will increase the trade deficit with Japan!
Masa (SoftBank) of Japan has agreed to invest $50 billion in the U.S. toward businesses and 50,000 new jobs....— Donald J. Trump (@realDonaldTrump) December 6, 2016
Masa said he would never do this had we (Trump) not won the election!— Donald J. Trump (@realDonaldTrump) December 6, 2016
From Don Boudreaux:
Trump Negotiates a Deal To Raise the U.S. Trade Deficit!
Here’s a letter to the Wall Street Journal:
You report that “Softbank Group Corp. Chairman and Chief Executive Masayoshi Son said Tuesday he would invest $50 billion in the U.S. and create 50,000 new jobs, following a 45-minute private meeting with President-elect Donald Trump” (“SoftBank Pledges to Invest $50 Billion in U.S. After Meeting With Trump,” Dec. 6).I wonder if Mr. Trump – who appears to be very proud of having brokered this deal – realizes that he has just arranged for an economic outcome of exactly the sort that he and his advisors repeatedly insist spells doom for the American economy – namely, a rise in the U.S. trade deficit, in this case to the tune of $50 billion!Sincerely,
Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030