Why Does the U.S. Always Run a Trade Deficit?

Thomas Klitgaard

The obvious answer to the question of why the United States runs a trade deficit is that its export sales have not kept up with its demand for imports. A less obvious answer is that the imbalance reflects a macroeconomic phenomenon. Using national accounting, one can show deficits are also due to a persistent shortfall in domestic saving that requires funds from abroad to finance domestic investment spending. Reducing the trade imbalance therefore requires both more exports relative to imports and a narrowing of the gap between saving and investment spending.

Grounded by Accounting

To give some intuition for why the trade deficit is equal to the gap between saving and investment spending, assume the U.S. economy is closed to the rest of the world. That is, there are no imports or exports. Spending is either on the consumption of goods and services or investment spending on equipment, structures, and intellectual property products. Income is allocated to either consumption or to saving by households, businesses, and government. In a closed economy, spending equals income—that is, the sum of consumption and saving equals the sum of consumption and investment spending.

Spending (Consumption + Investment Spending) =
Income (Consumption + Saving)            

Because consumption drops out on both sides of the equation, investment spending equals domestic saving in the economy. This makes sense: the funds available to invest in productive projects have to come from domestic savers.

Opening up the economy to external borrowing or lending allows domestic saving and investment spending to diverge. In the case of the United States, the economy borrows from the rest of the world because domestic saving is insufficient to fully finance investment spending.

Investment Spending = Domestic Saving + Foreign Saving (through net financial inflows)

So how is the saving gap connected to international trade? If imports and exports are equal, then the revenue earned from exports matches the spending on imports. If export revenues don’t cover imports, then a country has to offer up IOUs. These come in the form of foreign funds buying domestic assets instead of U.S. exports.

Imports = Exports + Net sales of U.S. assets (net financial inflows)

Note that these inflows are fungible, so they might initially be used to buy U.S. government bonds, but that frees up other funds to finance the building of homes and the outfitting of factories. (There are financial flows out of the United States to buy foreign assets, so the net of these flows equals U.S. borrowing.)

The key insight is that the amount of U.S. borrowing is the same whether viewed as the difference between saving and investment spending or between exports and imports. It is what it is, and it has to be the same value in both calculations, diverging only because of statistical discrepancies.

What the Data Say

The chart below shows gross U.S. saving and investment spending since 2000, with both calculated as shares of nominal GDP to make the values comparable across time. From 2000 to 2007, the gap widened as investment spending as a share of GDP dipped and then recovered while the saving share failed to fully recover. The gap contracted with the global financial crisis in 2008 as investment spending fell by more than saving, and then narrowed further as saving staged a stronger recovery. More recently, saving dipped during the pandemic and has stayed low in the aftermath while investment spending as a share of GDP has been stable over the whole period.

Saving Has Been Persistently Less Than Investment Spending

Share of GDP (percent)

The chart below breaks out household, business, and government saving. (Saving is the difference between income and expenses, with expenses not including investment spending.) Business saving is the most stable, dropping with the financial crisis and rebounding to above its pre-crisis level, then staying near there ever since. Household saving as a share of GDP held up well during the financial crisis, then moved above its pre-crisis level until the pandemic, when it jumped as a result of government transfers and restrictions on consumer spending. It has since stayed below its pre-pandemic level, in part due to consumers spending down the unusually high amount of saving accumulated in the 2020-21 period. Notice that total saving is more stable than the individual components because of offsetting movements, particularly between household and government saving.

Household and Government Saving Often Offset Each Other

Share of GDP (percent)

Macro versus Micro

The saving gap framework helps clarify what trade policies can and can’t do. For example, a free-trade agreement encourages exports, and an industrial policy can foster a re-shoring of production to replace imports. Such policies influence the size and composition of cross-border trade, but the difference between imports and exports is only affected if these policies also change the gap between domestic saving and investment spending.

The chart below illustrates how focusing on imports and exports can be misleading. In 2011, the U.S. trade deficit in petroleum products reached $330 billion. The overall trade deficit, measured by the current account, was $455 billion, so oil accounted for roughly 75 percent of the entire deficit. Surely the deficit would shrink if the United States wasn’t dependent on imported oil. As it turned out, a dramatic increase in domestic oil output caused the oil deficit to disappear by 2019. Nevertheless, the overall deficit grew to $441 billion, consistent with a wider saving gap.

The Overall Trade Balance Is Not Tied to Specific Items

Share of GDP (percent)

Debating Trade Deficits

An argument against running a trade deficit is that it requires U.S. assets that would otherwise have been held domestically to be sold to foreign investors. As a consequence, income generated by these assets flows out of the country instead of going to domestic investors.

The saving gap perspective tells a contrary story. Investment spending would have been lower if not for the United States being able to borrow from the rest of the world. One can argue that this funding raised the economy’s productive capacity from what it would have been otherwise.

Finally, achieving the goal of a smaller trade deficit will likely be painful, since it requires a recalibration of domestic savings and investment. Studies have found that episodes of substantial reductions in trade deficits were typically facilitated initially by lower investment spending and subsequently through higher saving, as was the case with the improvement in the U.S. current account during the 2008 recession and its aftermath.

How to cite this post:
Thomas Klitgaard, “Why Does the U.S. Always Run a Trade Deficit?,” Federal Reserve Bank of New York Liberty Street Economics, May 20, 2025, https://libertystreeteconomics.newyorkfed.org/2025/05/why-does-the-u-s-always-run-a-trade-deficit/.