From Michael Lucas at MI:

While trade deficits are a common cause for concern among polticians, economics teaches that trade surpluses and deficits do not matter. That is, each have their costs and benefits and a country’s total trade balance with the world will always be zero.

Why? Because when a trade deficit emerges between, say, the U.S. and China, more Dollars flow out of the U.S. via imports than flow in via exports. China is then in possession of U.S. Dollars which it can use either to buy goods from other countries; stuff under its mattress to depreciate in value; or invest back into U.S. industry. Holding the Dollars is a boon to Americans who then experience the benefits of a currency with greater purchasing power, while investing that money in American industry results in a growing economy with more jobs and higher wages. If those Dollars are used to buy goods from other countries, they are then in the same position as China, and eventually those Dollars flow back into the U.S.

Whenever a trade deficit emerges, therefore, the money sent overseas finds its way back to the U.S. in the form of U.S. exports or U.S. investment. The end result, therefore, is a wash. Trade deficits don’t matter.

This reminds me of the (perhaps apocryphal) story that Beryl Sprinkel dismissed concerns about the balance of payments because…the Balance of Payments was always by definition in balance.

To be clear — a trade deficit is not necessarily a bad thing, nor a good thing. It depends on the context.

However, to say a trade deficit doesn’t matter is beyond weird. The assertion that any trade deficit that results in dollars being then used to buy goods or invest in America is true in a balance of payments accounting identity. But surely this condition must have an impact on goods prices or asset prices or both, and this should in turn have an impact on lots of other things (return on capital, wage rates, potential GDP). I’m sure I could go on and on, but I’ll let readers decide on the merits of Mr. Lucas’s argument.

The article is also peppered with somewhat irrelevant statements: “Small declines in exports can be seen from 2018 to 2020, but since 2020 nominal trade volumes have increased.” Contra, see this post. His argument that the relevant price indices understate changes in purchasing power seems bizarre to me without further explanation. 

Mr. Lucas also appeals to Wisconsin employment behavior in the wake of the tariffs. I’ll merely note that while employment rose immediately after the imposition of tariffs, by the eve of the pandemic, employment, hours worked and value added in manufacturing were below June 2018 levels (Section 301 tariffs in effect in July).

Mr. Lucas on WI employment trends.