Views on Economic impact

Modern economists are split on the economic impact of the trade deficit.

Trade deficit considered harmful

Some economists believe that GDP and employment can be dragged down by an over-large deficit over the long run.

Those who ignore the effects of long run trade deficits may be confusing David Ricardo's principle of comparative advantage with Adam Smith's principle of absolute advantage, specifically ignoring that latter. The economist Paul Craig Roberts notes that the comparative advantage principles developed by David Ricardo do not hold where the factors of production are internationally mobile. Free trade concepts presume free floating currencies; however, in the real world, currencies such as China's are not free floating, while others may be manipulated by governments.

Since the stagflation of the 1970s, the U.S. economy has been characterized by slower GDP growth. In 1985, the U.S. began its growing trade deficit with China. Over the long run, nations with trade surpluses tend also to have a savings surplus while the U.S. has been plagued by persistently lower savings rates than its trading partners which tend to have trade surpluses with the U.S., Germany, France, Japan, and Canada have maintained higher savings rates than the U.S. over the long run. In 2006, the primary economic concerns have centered around: high national debt ($9 trillion), high non-bank corporate debt ($9 trillion), high mortgage debt ($9 trillion), high financial institution debt ($12 trillion), high unfunded Medicare liability ($30 trillion), high unfunded Social Security liability ($12 trillion), high external debt (amount owed to foreign lenders) and a serious deterioration in the United States net international investment position (NIIP) (-24% of GDP), high trade deficits, and a rise in illegal immigration. These issues have raised concerns among economists and unfunded liabilities were mentioned as a serious problem facing the United States in the President's 2006 State of the Union address

Trade deficit is not significant

Those who defend this position refer to explanations of comparative advantage. Buyers in the receiving country send the money back. A firm in America sends dollars for Brazilian sugarcane, and the Brazilian receivers use the money to buy stock in an American company. This may lead to profits leaving the U.S however as Americans may forfeit control. Although this is a form of capital account reinvestment, it may not be a liability on anyone in America.

Such payments to foreigners have intergenerational effects: by shifting the consumption schedule over time, some generations may gain and others lose. However, a trade deficit may incur consumption in the future if it is financed by profitable domestic investment, in excess of that paid on the net foreign debts. Similarly, an excess on the current account shifts consumption to future generations, unless it raises the value of the currency, deterring foreign investment.

However, trade inequalities are not natural given differences in productivity and consumption preferences. Trade deficits have often been associated with international competitiveness. Trade surpluses have been associated with policies that skew a country's activity towards externalities, resulting in lower standards. An example of an economy which has had a positive balance of trade was Japan in the 1990s.

Milton Friedman and Dewly Tiwana argued that trade deficits are not important as high exports raise the value of the currency, reducing aforementioned exports, and vise versa for imports, thus naturally removing trade deficits not due to investment. This opinion is shared by David Friedman, who has said that they are 'fossil economics', based on ideas obsolete since David Ricardo.