The cause of the U.S. trade deficit might not be what you think

The U.S. imported more than it exported in August, according to an early estimate out last week. The trade deficit rose a steep 11% to $133 billion.

An updated measure will come out Tuesday, Oct. 6, but the trade deficit has been gradually increasing in fits and starts over the past year.

Some of that is all the chips companies are importing for the artificial intelligence build-out, but that’s not the only reason. In fact, we can pinpoint the broader cause — and it’s probably not what you think.

Shrinking the trade deficit was in theory the whole point of President Donald Trump’s tariffs. The White House decided what country got what tariff based on the U.S. trade deficit with every country.

But it turns out one of the big reasons we have such a big trade deficit in the first place is literally the U.S. government — specifically all the deficit spending. What does this have to do with import and exports? Well, let’s go on a little journey down the road of unintended economic consequences.

The government spends more than it has, so it has to borrow and pay the money back with interest.

“Foreigners see that, and they say, ‘Hey, the U.S. government is paying 4% to borrow and my own government only paying 2%. So why don’t I put some of my money over there in the U.S.,’” said Joe Gagnon, senior fellow at the Peterson Institute for International Economics.

There’s just one catch here: To invest in the U.S., those foreigners need dollars. So all these foreign investors are looking for dollars, making dollars more popular, thereby making dollars more expensive and stronger. And guess what?

“That is what makes imports look cheap to Americans, the strong dollar,” Gagnon said.

This is why we import so much. It’s is why Americans buy, say, deck chairs on Amazon that were made in Vietnam. And guess what a strong dollar does to our exports?

“It also make our exports more expensive,” he said.

More imports, fewer exports, bigger trade deficit. That’s how it works: The government’s overspending causes borrowing, strengthens the dollar, shifts imports and exports, and contributes to the U.S. trade deficit.

“We have a government that is $30-plus trillion in debt, and part of the trade balance reflects that imbalance,” said Scott Lincicome, vice president of general economics at the Cato Institute. “If American policymakers are really worried about the trade deficit, the number-one thing they could do isn’t enact a bunch of tariffs or trade agreements. It’s balance the budget.”

To be fair, it’s not just our government gobbling up foreign investment and driving up the price of the dollar and therefore the trade deficit. Foreigners want dollars to invest in all kinds of American stuff — like the AI boom or the stock market or U.S. businesses. Having a big trade deficit is just a sign there’s a lot of investment coming in.

Which is why for all the screaming and yelling about trade deficits, most economists aren’t too concerned.