The Myth of ‘Evil’ Trade Deficits

As we move toward the beginning of the second presidency of Donald Trump, and the revision of the USMCA pokes out its head on the horizon, the widening US trade deficit with Mexico will be intensively scrutinized and discussed, and tariff threats could increase in this environment. But trade deficits, which aren’t necessarily a negative outcome for the United States, won’t be “fixed” through tariffs. Furthermore, this sort of trade barrier can actually be harmful for everybody, including American households and firms.

The return of Trump to the White House means that deficits will be closely watched and constantly discussed. He conceives international trade as a zero-sum game (what one country earns is equivalent to the loss incurred by its partner), and trade balances are a simple way to “keep the score.” Hence, the widening US trade deficit with the rest of the world is seen by the returning American president as some sort of evil that must be fixed.

It’s in this environment in which Mexico surpassed China as the US’s largest trade partner. As of 2023, total exchange in goods between both North American economies reached US$746 billion, while Mexico’s trade surplus with the United States widened to US$235 billion last year, US$102 billion more than in 2017. Mexico’s main exports to the United States last year were led by vehicles (including their parts), followed by electrical equipment (insulated wiring sets for vehicles and others, communication apparatus, TV reception apparatus), and machinery (data processing units, air conditioning machines, refrigerators). What is more, trade between Mexico and China has also been very dynamic. Total exchange of merchandise climbed from US$81 billion in 2017 to US$124 billion last year. Mexico’s deficit with the Chinese economy jumped from US$67 to US$104 billion during the same period. Most Mexican imports from China consist of electrical equipment (phones, computers, office appliance components), transport equipment (vehicles and their parts), and common metals (aluminum).

Mexico’s growing deficit with China has created the suspicion that Mexico has become the backdoor for Chinese products to enter the North American market. Furthermore, Mexico is experiencing significant insecurity and illegal migration issues, a diminishing institutional framework, and increasing government interference in key sectors (such as energy).

My best guess is that Trump will rely on the threat of tariffs to fulfil his campaign promises to not only “rebalance” trade, but to end illegal immigration and confront the insecurity problem on the southern border. Trade talk could be intended to force Mexican authorities to restrict imports of Chinese goods, and stop migrant caravans, among others. There is a good chance that his rhetoric becomes harsher once he takes office in January, and as we move closer to the revision of the USMCA (the free trade agreement for North America) in 2026.

But tariffs are not very effective for “fixing” deficits, and they can actually inflict pain on US households. Firstly, since the beginning of the trade war, in 2018, and up to 2023, the US trade deficit with the rest of the world only increased, going from US$870 billion to US$1.06 trillion in that period. 

Secondly, it is often stated that trade barriers are intended to protect domestic producers and enhance federal government revenues. But tariffs imposed by the US on foreign partners are – to some degree – passed on to consumers. Furthermore, US producers can also be affected by the disruption of global supply chains and slowing export demand, especially when trade partners implement retaliatory measures.

What is more, trade deficits are far from harmful to the United States. Let’s take a look at the US balance of payments. Yes, trade in goods explained the US$905 billion current account deficit in 2023. But, on the other side of the balance of payments, the financial account reported a net income of US$908 billion;, for example, investment inflows, which economic development is built on. In simple terms, trade balances represent just one piece of the whole puzzle that describes the transactions between the United States with the rest of the world. While the United States buys more goods from other countries, it receives investment inflows in exchange.

Being aware that assuming a “tough stand” on trade has become a profitable political strategy in recent years, Trump won’t stop throwing tariff threats at any country with a trade deficit against the United States, mainly China and Mexico. He might even fulfil some of those threats once he takes office in January. But, as discussed above, his aim to “rebalance trade” is short-sighted and would unlikely be attained through tariffs, whose negative effects will be felt by American families and companies.