On Wednesday, April 2, 2025, the US President Trump announced that he will apply at least a 10 percent tariff on all exporters to the US, with even higher duties on some 60 nations, to counter large trade imbalances with the US. That includes some of the country’s biggest trading partners, such as China—which now faces a tariff of well above 50 percent on many goods—as well as the European Union, Japan and Vietnam.
The president said that large and persistent annual trade deficits have led to the hollowing out of the US manufacturing base, inhibited ability to scale advanced domestic manufacturing capacity, undermined critical supply chains, and rendered the US defense-industrial base dependent on foreign adversaries.
It seems that some commentators, including President Trump, consider the trade account balance as the single most important piece of information regarding the health of the economy. According to the popular view, a surplus on the trade account is considered as a positive development, while a trade deficit is perceived as negative. What is the reason for this?
According to such mistaken thinking, the key to economic growth is demand for goods and services. Increases and decreases in demand are allegedly behind the fluctuations in the economy’s production of goods and services. Hence, in order to keep the economy going, economic policies must pay close attention to the overall demand. Now, part of the demand for domestic products comes from overseas. The meeting of this demand through foreign trade are exports. Equally, local residents exercise demand for goods and services produced overseas, which are imports.
It is believed that, while an increase in exports strengthens the demand for domestic products, an increase in imports weakens the demand. Exports—according to this way of thinking—are a factor that contributes to economic growth, while imports are assumed to detract from the growth of the economy. Hence, whenever imports exceed exports—a negative trade balance—this is considered as bad news for economic activity, as depicted by the gross domestic product (GDP). Using GDP as a measure of economic health, it is important to keep in mind that in the GDP formulate exports add to GDP while imports subtract from it.
The trade deficit is regarded as a symptom of bad economic health. Subsequently, what is then required is a boost to exports and a curtailing of imports in order to reduce the trade deficit. It is believed that this will lead to improved economic well-being. Further, this view maintains that it is the role of the government and the central bank to introduce a suitable mix of policies which will guide the economy along the path towards a “favorable” trade balance. But, does it all make sense?
Individual versus Total Trade Account Balances
In a market economy, each individual trades and/or sells goods and services for money and uses money to buy desired goods and services. The goods and services sold by individuals could also be called their exports, while the goods and services bought could be called imports. The record of such monetary exchanges for any period could be categorized as the trade balance for that period. Obviously, all the trades involved a positive-sum game—both sides benefited from the voluntary exchange.
In a free market economy, individuals’ decisions regarding the selling and buying of goods and services (i.e., their exports and imports) are made voluntarily, otherwise it would not be undertaken. The emergence of an exchange between individuals implies that they expect to benefit from this. According to Rothbard, “There is therefore never a need for anyone to worry about anyone else’s balance of payments” (emphasis in original).
The current practice of lumping individuals’ trade balances into a national trade balance is of little relevance to businesses. What possible interest can an entrepreneur have with the national trade account balance? Will it assist him in his conduct of his business? According to Mises,
While an individual’s balance of payments conveys exhaustive information about his social position, a group’s balance discloses much less. It says nothing about the mutual relations between the members of the group. The greater the group is and the less homogeneous its members are, the more defective is the information vouchsafed by the balance of payments.
While the national trade account balance is of little economic significance to businesses, individual or company trade balances carry economic importance. For instance, the trade account balance statement of a particular company could be of help to various investors. Whereas the national trade balance data is harmless, the government’s reaction to it can produce harmful effects. Government policies that aimed at attaining a more “favorable” trade account balance by means of tariffs disrupts the harmony in the marketplace. This disruption leads to a shift of scarce resources away from the production of the most-desired goods and services, towards the production of less-desirable goods and services.
Besides, it is not the US that exports goods and services, but individuals. For example, it is not the US that exports wheat, but a particular farmer or a group of farmers. They are engaged in the exports of wheat because they expect to profit from the transaction. Likewise, it is not the US that imports Chinese electrical appliances, but an individual from the US or a group of Americans. They import these appliances because they believe they will benefit in some way.
If the national trade balance is an important indicator of economic health—as various commentators imply—one is then tempted to suggest that it would be a sensible idea to ascertain the trade balance conditions of cities or regions. After all, if we could detect the economic malaise in a particular city or a region, the treatment of the national malaise could be made much easier. Consider that economists in New York have discovered that their city has a massive trade deficit with Chicago. Does this mean that the city of New York authority should step in to enforce the reduction of the deficit by banning imports from Chicago?
No individual or group of individuals can suffer as a result of “unfavorable” trade balance. In fact, we have a negative trade balance with many of the stores we patronize. This does not mean that anyone is worse off by the exchanges. Quite the opposite. Suffering, however, can emerge from a drop in incomes of individuals because of the government tampering with the economy.
The fallacy of the national trade account balance is also relevant to the national foreign debt. If an American lends money to an Australian, the entire transaction is their own private affair and is not of any concern to any one else. Both the American and the Australian are expecting to benefit from this transaction. Lumping individuals’ foreign debt into the total national foreign debt is a questionable practice. What is this total supposed to mean? Who owns this debt? What about all those individuals who do not have foreign debt? Should they also be responsible for the national foreign debt?
The only situation in which individuals should be concerned with foreign debt is when the government incurs the debt. The government is not a wealth-generating unit and, as such, derives its livelihood from the private sector. Consequently, any foreign government debt incurred means that the private sector will have to foot the bill sometime in the future.
According to much fallacious popular thinking, a widening in the trade deficit is seen as negative for economic prosperity, since it undermines the growth rate of GDP. Because of this, it is further assumed that the government and the central bank should intervene with policies that will result in the trimming of the trade account deficit. However, government and central bank policies designed to reduce the deficit can only lead to the misallocation of scarce resources and the lowering of individuals’ living standards.
