AYESHA RASCOE, HOST:
Both tensions and relations between the U.S. and its two neighbors - Canada and Mexico - are a bit cooler at the moment, largely due to trade. This past week, President Trump delayed the implementation of tariffs that would have upended North American trade. One of his biggest complaints - trade deficits.
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PRESIDENT DONALD TRUMP: Tremendous deficits with Mexico and Canada. And why? What's the purpose of that? Why would we have deficits?
RASCOE: We'll put that question now to Mary Lovely. She's a senior fellow with the Peterson Institute for International Economics, and she joins us in our studio. Good morning.
MARY LOVELY: Good morning, Ayesha.
RASCOE: First thing's first. What is a trade deficit?
LOVELY: A trade deficit is basically the difference between what we buy from the rest of the world and what we sell to the rest of the world. In this case, President Trump is usually focused on the goods deficit. So it's really what we sell in terms of physical manufactured goods as opposed to services where we have a surplus.
RASCOE: Basically, we are buying more goods than we're selling.
LOVELY: Absolutely.
RASCOE: President Trump often says that countries like Canada and Mexico are ripping off the U.S. and points to the trade deficit with them as an example. Does he have a point? Is there some sort of ripping off happening in these trade relations?
LOVELY: Not by this measure. I mean, there may be cases where we feel that other countries have unfair trade practices that hinder our exporters. But no, this is not a good measure, and certainly not that they're ripping us off. I mean, when I go to the grocery store, you know, I give them money. Are they ripping me off? No, I get groceries in return. It's not a very large deficit with Canada, but we buy more from Canada than we sell to Canada. So we get wood products, aluminum, parts of automobiles, and they get usually assets in the United States. So our IOUs. Does that sound like ripping off to you? It doesn't sound that way to me.
RASCOE: So does a trade deficit serve as a good measure of a country's economic strength or weakness when it comes to trade?
LOVELY: No.
RASCOE: OK.
LOVELY: It's a very simple answer. No.
RASCOE: OK.
LOVELY: It does not. There's lots of reasons why a country might run a trade deficit overall. It does really matter where countries are in terms of the international kind of division of labor - who produces what. For example, Japan, a manufacturing powerhouse but natural resource-poor. So it's going to run deficits with natural resource-rich countries. It's going to import a lot of oil from the Middle East and from the United States, from other places. But then it's going to run surpluses with countries that want to buy, you know, electronics or cars or other things. So the real basis for thinking about why we have a trade deficit is that we're spending more than we make. Our savings are not enough to do all the investment that wants to be done in the United States.
RASCOE: If the U.S. starts using high trade barriers like tariffs to shrink trade deficits or even to balance trade as the president seems to want to achieve, do you think that would be a helpful or good idea, or how would that affect the economy?
LOVELY: I think the answer is really simple. It makes us poorer, and in the short run, it's going to be deeply destabilizing to the U.S. economy. You know, we saw just over the weekend with the threats against Mexico and Canada, that businesses were like, what are we going to do now? You know, a lot of confusion. I think even if we do it over a longer period, it's clearly going to decrease our aggregate welfare because we are going to have to switch to producing, you know, plastic boots for our children in the winter, toys, things that, you know, have very low value relative to the wages that Americans want to earn and should be earning.
Yes, for some people, a factory job could be an excellent job, but usually, they're in factories that are producing things that have higher value. So automobiles, airplanes, advanced equipment that we sell abroad. Say farm equipment. It's not these very labor-intensive things that can be done in other countries, in the rest of the world for far cheaper.
I think what Americans are really looking for are good jobs that pay living wages. You know, putting yourself into a toy factory. I think people should take a minute and think about what the reality is there and ask yourself, are you going to be earning 25, $30 an hour? And the answer can be no. How much do you think that Barbie doll is going to sell for?
RASCOE: I don't want to pay more than about 5, $10 for Barbie doll (laughter), unless it's a very special holiday one. Last week, the U.S. Department of Commerce released data showing the total trade deficit for the U.S. hit a record high in 2024. Should we interpret that data point differently than we do country by country, say, looking at the overall trade deficit versus looking at it country by country?
LOVELY: Yeah, it makes no sense to try to balance out our trade country by country. As a country as a whole, we are borrowing from the rest of the world. They are accumulating our IOUs, whether it's treasury bonds or stocks in American companies or perhaps even real estate in the U.S., and we have to ask, OK, we're taking on debt. What is the value of that debt? The answer isn't automatically it's bad.
There are degrees to which things are more or less important. We have to have that conversation. And I think an important place to start is with the federal budget deficit. It's twice as big as our trade deficit. It is an enormous source of borrowing. And so we have to ask, do we need tax cuts? Do we need to control spending? If we do, where do we want to control that spending?
These are very difficult political questions, and you and I may have very different answers, but that's really the conversation that we need to have. You know, blaming other countries is easier, frankly, than looking inward and saying, how do we really want to allocate our resources? Should the government be spending less or taxing more to close that deficit? Those are harder problems, but they're ones that Americans really need to tackle.
RASCOE: That's Mary Lovely of the Peterson Institute for International Economics. Thank you so much for being with us.
LOVELY: You're welcome.
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