Trump Keeps Lying About Trade Deficits

Trade deficits aren't a scam or subsidy.

Trump’s aggressive use of tariffs in the first few weeks of his second term wasn’t surprising. But the way he went harder on Canada and Mexico (25% tariffs) than on China (10% tariffs) definitely caught a lot of people off guard.

For now, the Canada-Mexico tariffs have been put on hold after some last-minute wheeling and dealing by Trump. We’ll see what comes next, but one thing is clear: Trump’s love of tariffs isn’t going away anytime soon.

My take is that when used sparingly and strategically, tariffs can be a powerful tool. But used recklessly, they can backfire—hurting businesses, consumers and the economy broadly.

I’d love to be optimistic about Trump’s approach to trade, but some of the things he says give me pause. Take, for instance, his belief that trade deficits are some sort of scam.

He’s been saying this for years—and he did it again right before hitting Canada and Mexico with tariffs.

You can see it in this tweet from 2018:

And in this post from Truth Social earlier this month, where he even implies that our trade deficit with Canada is a subsidy:

Either Trump has no idea how trade works, or he’s deliberately misleading people. The idea that a trade deficit is a subsidy is absurd!

A trade deficit simply means we buy more from a country than we sell to them. That’s it.

To illustrate, let’s imagine the U.S. and Canada only trade two things: maple syrup and barbecue sauce.

• The U.S. sells $800 million worth of BBQ sauce to Canada

• The U.S. buys $900 million worth of maple syrup from Canada

• That means the U.S. runs a $100 million trade deficit with Canada

• And from Canada’s perspective, they run a $100 million trade surplus with the U.S.

But here’s the key point: That $100 million isn’t a handout to Canada. We got something in return—delicious maple syrup. It was a voluntary exchange. No one forced us to buy anything.

Now, in reality, the U.S.-Canada trade relationship is way more complex than just syrup and BBQ sauce. Hundreds of billions of dollars in goods and services flow between the two countries every year.

Source: TD Economics

And despite Trump’s rhetoric, our actual trade deficit with Canada is small—it was just $45 billion last year, which is about 4% of the total U.S. trade deficit.

Not to mention, the deficit with Canada is mostly due to oil and gas imports. Without those, the U.S. actually runs a trade surplus with Canada.

So, that’s point #1: trade deficits are not subsidies.

Now let’s talk about something else that Trump never mentions—the fact that the flow of money between countries always balances out.

In economics, this is called the balance of payments, which consists of two main parts:

• The Current Account, which tracks trade in goods and services (like our syrup and BBQ example)¹
  

• The Capital and Financial Account, which tracks investment flows²

These two accounts always balance out. If the U.S. runs a current account deficit, it also runs a capital account surplus—meaning foreigners invest more in the U.S. than we invest abroad.

That’s not a bad thing. The U.S. is one of the most attractive places for investment in the world. People want to buy American assets—whether it be stocks, bonds, real estate, or factories—so they need U.S. dollars. To get them, they sell more goods to the U.S. than they buy from us.

This is one big reason why the U.S. has consistently had trade deficits since the 1980s.

Source: Cato Institute

So, trade deficits aren’t automatically bad—it depends on the context. In fact, some countries with large trade surpluses, like Germany, Switzerland, and South Korea, have seen weaker economic performance than the U.S.

Source: The Economist

Whether a country runs a trade surplus or a trade deficit isn’t a measure of economic success on its own. It’s just one piece of the larger economic puzzle.

When Trade Deficits Do Matter

While trade deficits aren’t necessarily bad, not all of them are created equal. Some reveal deeper economic issues—like the case with China.

The U.S. runs its largest trade deficit with China, but that’s not just because China makes cheap stuff.

It’s because the Chinese government heavily subsidizes key industries, allowing Chinese companies to sell goods below cost (a practice known as dumping). That undercuts foreign competitors and distorts global markets.

China has done this for decades, devastating the U.S. manufacturing industry in the process. So, in the case of China, tariffs might actually make sense to level the playing field.

That said, I think industrial policy—where the U.S. subsidizes key strategic industries (essentially matching what China is doing)—is a more effective way to compete with China than tariffs. But you can certainly make a legitimate case for tariffs against China as well.

In any case, that’s a very different situation than the one with Canada, where our trade deficit is small and there’s no clear justification for tariffs.

Why Is Trump Targeting Canada & Mexico?

So, if the economics don’t back up Trump’s tariffs on Canada, what’s really going on? Why is he targeting the country?

Well, Trump has other grievances.

With Canada, he’s complained they don’t spend enough on defense and that they free-ride on U.S. military protection. He’s even floated the idea of making Canada the 51st state—so, maybe tariffs are his way of strong-arming them into submission.

As for Mexico, Trump’s justification for tariffs has been immigration and drug trafficking. Stopping illegal immigration into the U.S. was one of Trump’s top campaign promises, so it’s not that crazy that he’s using tariffs as a way to achieve that.

Now, if Trump wants to use tariffs as leverage for issues like border security or defense spending, that’s one thing. But there’s no reason to mislead people by calling trade deficits a "subsidy."

He can make his point without misrepresenting the facts about trade.

To his credit, Trump was ahead of most politicians in calling out China’s unfair trade practices. That’s where his focus should continue to be—not dragging Canada into this for no good reason.

Even Mexico might be a real trade issue—but not in the way Trump usually frames it. There’s growing concern that Chinese companies are setting up shop in Mexico to evade U.S. tariffs on China. That’s something worth keeping an eye on.

Trump has a real opportunity here. There are legitimate concerns about the trade practices of some of America’s trading partners, particularly China.

I just think that if he ditches the misleading arguments and focuses on the real threats, he could make a much stronger case.

1. The biggest part of the current account is usually the trade balance, but it also includes income from foreign investments (dividends, interest payments), wages earned by citizens working abroad, and one-way transfers like foreign aid and remittances

2. This includes foreign direct investment (like building factories or buying real estate), portfolio investment (like stocks and bonds), and changes in central bank reserves