	Overview

Congress has demonstrated long-standing interest in the U.S. trade deficit as part of its efforts to examine U.S. trade policy and key trading relationships. In some areas, particularly in negotiating trade agreements, Congress has opted to delegate certain authorities to the executive branch. A key element of the Trump Administration's approach to international trade has been the use of the U.S. trade deficit as a barometer for evaluating the success or failure of the global trading system, U.S. trade policy, and trade agreements. Although Congress and previous Administrations have focused on the trade deficit as a key economic issue at times, they generally have not implemented specific measures to lower the trade deficit or to make reducing bilateral trade deficits a major objective in evaluating or negotiating U.S. free trade agreements (FTAs). It also has used numerous other policy tools to address specific trade and investment issues regarding U.S. commercial economic engagement with other countries to achieve a level playing field, and other trade policy objectives. Some analysts argue that trade agreements play an important role in the U.S. trade deficit; they contend the agreements have failed to provide U.S. exporters with reciprocal treatment or have exposed U.S. producers to increased competition. While most economists are concerned over the long-term impact of sustained trade deficits on the economy, they question the role that trade agreements play in determining the trade deficit or the conclusion that the trade deficit is substantially the product of unfair treatment. Most economists, however, argue that this characterization misrepresents the nature of the trade deficit and the role of trade in the U.S. economy. In general, most economists conclude that the overall U.S. trade deficit stems from U.S. macroeconomic policies and, as such, attempting to alter the trade deficit without addressing the underlying macroeconomic issues would be counterproductive and create distortions in the economy. Addressing these issues may be worthwhile, but is unlikely to affect the overall U.S. trade deficit. Standard economic theory recognizes, however, that some workers and producers in the economy may experience a disproportionate share of the short-term adjustment costs that are associated with shifts in resources stemming from greater international competition. Although the attendant adjustment costs for businesses and labor are difficult to measure, some estimates suggest they may be significant over the short run and can entail dislocations for some segments of the labor force, companies, and communities. This gap between domestic savings and the demand for capital is filled by capital inflows. One concern expressed by economists and others is the debt accumulation associated with sustained trade deficits. They argue that the long-term impact on the economy of borrowing to finance imports depends on whether those funds are used for greater investments in productive capital with high returns that raise future standards of living, or whether they are used for current consumption. As indicated, most economists argue that the macroeconomic origins of the U.S. trade deficit mean that trade agreements tend to alter the composition of the trade deficit among various trading partners and among a different mix of goods and services, but they are unlikely to alter the overall size of the U.S. trade deficit. Some countries, however, may not be fully abiding by international trade agreements and rules, or they may continue to maintain certain trade barriers. In general, the unemployment rate and the trade deficit are not directly related. While many of the economic arguments can be arcane at times, economists generally contend that from the perspective of the economy as a whole, both consumers and producers benefit from liberalized trade and that the gains for the economy as a whole outweigh the costs, irrespective of the bilateral trade deficit or surplus. Most economists argue that the economy operates more efficiently as a result of competition through international trade and that consumers throughout the economy experience a wider variety of goods and services at varying levels of quality and price than would be possible in an economy closed to international trade. They also contend that trade may have a long-term positive dynamic effect on an economy that enhances both production and employment. Since taking office, the Trump Administration has used the U.S. trade deficit as a proxy for evaluating the success or failure of the global trading system and of U.S. trade policy.
The economic effects of the U.S. trade deficit have been a topic of long-standing congressional interest. The U.S. Constitution grants authority to Congress to regulate commerce with foreign nations and to lay and collect duties, and Congress exercises this authority in numerous ways. These include oversight of trade policy and consideration of legislation to implement trade agreements and to authorize trade programs. In some cases, Congress has delegated certain authorities over trade policy to the Executive Branch: for example, to facilitate trade negotiations.
As part of efforts to examine U.S. trade policy and key trading relationships, Congress and previous Administrations have focused on the trade deficit at times, but generally have not implemented specific measures to lower the trade deficit. Nor has reducing bilateral trade deficits been a major objective in evaluating or negotiating U.S. free trade agreements (FTAs) and implementing trade laws. Previous Administrations rarely linked trade deficits and import tariffs with U.S. national security. The Trump Administration, however, is using the U.S. trade deficit as a barometer for evaluating the success or failure of the global trading system, U.S. trade policy, and bilateral trade relations with various countries. It also characterizes the trade deficit as harming the performance and national security of the U.S. economy.
The Trump Administration's approach contrasts with the views of most economists, who argue that the overall U.S. trade deficit stems from U.S. macroeconomic policies that create a savings and investment imbalance in which domestic sources of capital are not sufficient to meet domestic capital demands. As such, attempting to alter the trade deficit without addressing the underlying macroeconomic issues will likely be counterproductive and create distortions in the economy. Some analysts argue that trade agreements play an important role in the U.S. trade deficit; they contend the agreements have failed to provide U.S. exporters with reciprocal treatment or have exposed U.S. producers to increased competition. Most economists, however, question both the role that trade agreements play in determining the trade deficit and the position that the trade deficit is substantially the product of unfair treatment.
The Trump Administration's approach does not rule out the possibility that some countries may not be fully abiding by international trade agreements and rules, or may be maintaining certain trade barriers. Such actions may distort market performance and erode public support for the international trade system. As a result, addressing these issues and continuing to negotiate new agreements to remove trade barriers are likely to have benefits by improving efficiency and creating a level playing field in the global trading system. Nevertheless, given the macroeconomic origins of the trade deficit, as is generally accepted, addressing such distortions may alter the composition of U.S. trade among trading partners and commodities, but would be unlikely to affect the overall U.S. trade deficit.
Most economists also question the role the trade deficit plays in affecting jobs, wages, and the distribution of income in the U.S. economy. One concern expressed by economists and others is the debt accumulation associated with sustained trade deficits. They argue that the long-term impact on the U.S. economy of borrowing to finance imports depends on whether those funds are used for greater investments in productive capital with high returns that raise future standards of living, or whether they are used for current consumption. These concerns and the various policy approaches that have been used to alter the savings-investment imbalance in the economy are beyond the scope of this report.
Most economists generally contend that from the perspective of the economy as a whole, both consumers and producers benefit from liberalized trade and that the gains for the economy as a whole outweigh the costs, irrespective of the bilateral trade deficit or surplus. Most economists argue that the economy as a whole operates more efficiently as a result of competition through international trade and that consumers and producers who may use imported inputs throughout the economy experience a wider variety of goods and services at varying levels of quality and price than would be possible in an economy closed to international trade. They also contend that trade may have a long-term positive dynamic effect on an economy that enhances both production and employment.
Standard economic theory also recognizes that some workers and producers in the economy may experience a disproportionate share of the short-term adjustment costs that are associated with shifts in resources stemming from greater international competition. Although the attendant adjustment costs for businesses and labor are difficult to measure, some estimates suggest they may be significant over the short run and can entail dislocations for some segments of the labor force, companies, and communities. Policymakers generally have aimed to address such dislocations through specific training and other readjustment assistance programs, among other trade-related measures.