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When U.S. President Donald Trump imposed on imported goods on April 2, 2025—upending global trade and sending markets —he presented the move as a response to a crisis. In released the same day, the White House said the move was necessary to address "the national emergency posed by the large and persistent trade deficit."

A trade deficit—when a country imports more than it exports—is often viewed as a problem. And yes, the U.S. trade deficit is both large . Yet, as who has taught international finance at Boston University, the University of Chicago and Harvard, I maintain that far from a national emergency, this persistent deficit is actually a sign of America's financial and technological dominance.

The trade deficit is the flip side of an investment magnet

A trade deficit sounds bad, but it is neither good nor bad.

It doesn't mean the U.S. is losing money. It simply means foreigners are sending the U.S. more goods than the U.S. is sending them. America is getting more cheap goods, and in return it is giving foreigners financial assets: dollars issued by the Federal Reserve, bonds from the U.S. government and American corporations, and stocks in newly created firms.

That is, a trade deficit can only arise if foreigners invest more in the U.S. than Americans invest abroad. In other words, a country can only have a trade deficit if it also has an . The U.S. is able to sustain a large trade deficit because so many foreigners are eager to invest here.

Why? One major reason is the safety of the U.S. dollar. Around the world, from large corporations to ordinary households, the dollar is used for , . As the world economy grows, , from cash to Treasury bills and corporate bonds.

Because the dollar is so attractive, the Federal Reserve gets to mint extra cash for use abroad, and the U.S. government and American employers and families can . Foreigners eagerly buy these U.S. financial assets, which enables Americans to consume and invest more than they ordinarily could. In return for our financial assets, we buy more German machines, Scotch whiskey, Chinese smartphones, Mexican steel and so on.

Blaming foreigners for the trade deficit, therefore, is like blaming the bank for charging a low interest rate. We have a trade deficit because foreigners willingly charge us low interest rates—and we choose to spend that credit.

US entrepreneurship attracts global capital—and fuels the deficit

Another reason for foreigners' steady demand for U.S. assets is American technological dominance: When aspiring entrepreneurs from around the world start new companies, they often decide to do so in Silicon Valley. Foreigners want to buy stocks and bonds in these new companies, again adding to the U.S. investment surplus.

This strong demand for U.S. assets also explains why Trump's last trade war in 2018 : Tariffs, by themselves, do nothing to reduce foreigners' demand for U.S. dollars, stocks and bonds. If the investment surplus doesn't change, the trade deficit cannot change. Instead, the U.S. dollar just appreciates, so that imports get cheaper, undoing the effect of the tariff on the size of the trade deficit. This is basic economics: You can't have an investment surplus and a trade surplus , which is why it's silly to call for both.

It's worth noting that . If a normal country with a normal currency tries to print more money or issues more debt, its currency depreciates until its investment account—and its trade balance—goes back to something close to zero. America's financial and technological dominance .

That doesn't mean all tariffs are bad or all trade is automatically good. But it does mean that the U.S. trade deficit, poorly named though it is, does not signify failure. It is, instead, the consequence—and —of outsized American global influence.

The president's frenzied attacks on the nation's trade deficit show he's misreading a sign of American economic strength as a weakness. If the president really wants to eliminate the trade deficit, his best option is to rein in the federal budget deficit, which would naturally reduce capital inflows by .

Rather than reviving U.S. manufacturing, Trump's extreme tariffs and erratic foreign policy are likely to instead scare off foreign investors altogether and undercut the dollar's global role. That would indeed shrink the trade deficit—but only by eroding the very pillars of the country's economic dominance, at a steep cost to American firms and families.

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