In Trump’s fourth year in the White House, back in early 2020, I wrote that the trade deficit was rising because the economy was doing well.
I specifically observed in that column that “the trade deficit is increasing in large part because Trump’s pro-growth tax reforms and regulatory reforms are making America more attractive for foreign investors.”
He is simply pointing out an non-controversial accounting identity. When foreigners earn dollars by selling to Americans, they can either use those dollars to buy American products or they can invest those dollars in the American economy.
If they invest in the American economy (which Trump recognizes is a good thing), that necessarily means a higher trade deficit (which Trump thinks is a bad thing).
Here’s a chart showing that trade deficits and investment surpluses are mirror images.
What makes this column timely is that Trump is actively encouraging foreigners to use their dollars to make investments in the U.S. economy.
The week began with US President Donald Trump placing a $500 billion price tag on making his first foreign visit to Riyadh. Saudi Crown Prince Mohammed bin Salman pledged to boost investments and trade with the US to $600 billion during Trump’s presidency, while Saudi Arabia’s finance minister revealed the kingdom already holds over $770 billion in American investments. In his Davos address, Trump said that he’d ask the crown prince — “who’s a fantastic guy” — to round it up to $1 trillion. …The $500 billion Stargate project US President Donald Trump announced this week could be a catalyst for further Gulf investment in the US artificial intelligence sector. …There are plenty of other interested parties in the Middle East with deep pockets: The Qatar Investment Authority told Bloomberg that AI data centers and other infrastructure “could be an opportunity for us.”
For what it’s worth, I don’t think it’s the role of the American president to drum up support for specific investment projects. That reeks of cronyism.
But set that aside for purposes of today’s column.
The only thing I want readers to understand (and what I wish Trump understood) is that more foreign investment in America will automatically mean a higher trade deficit.
Dan Mitchell is co-founder of the Center for Freedom and Prosperity and Chairman of the Board. He is an expert in international tax competition and supply-side tax policy.
