Why has the U.S. been running a trade account deficit for so many years?

Understanding why this deficit persists requires us to explore the key economic drivers behind it and the broader implications of the U.S.'s role in the global financial system

By Xu Peng

Published: May 22, 2025 11:30:21 AM IST

Americans import more goods from abroad than they export, contributing to a widening trade deficit. Image: Shutterstock

Have you ever wondered how the world’s largest economy consistently spends more than it earns? The United States has consistently maintained a trade account deficit alongside a capital and financial account surplus for decades, reflecting a long-standing imbalance between imports, exports, and financial flows.

This phenomenon is deeply rooted in structural economic factors, global financial dynamics, and policy decisions. Understanding why this deficit persists requires us to explore the key economic drivers behind it and the broader implications of the U.S.'s role in the global financial system.

Key Drivers of the Persistent Current Account Deficit

1. High Consumer Spending and Fiscal Deficit

One of the primary reasons for the U.S. current account deficit is the spending habits of American consumers and the government’s fiscal policies. Several factors contribute to this high level of consumption:

● Low Savings Rates: American households tend to save less compared to their counterparts in countries such as Germany and China, where savings rates are significantly higher. The U.S. economy is largely consumption-driven, with personal consumption expenditures accounting for nearly 70% of gross domestic product (GDP).

● Easy Access to Credit: The U.S. financial system is structured to facilitate borrowing, providing widespread access to consumer credit, mortgages, and other lending products.

● Government Deficit Spending: The federal government consistently runs budget deficits, spending beyond its revenue collections. To finance these shortfalls, it relies on borrowing, primarily through the issuance of Treasury securities. These securities are frequently acquired by foreign investors, further exacerbating the current account imbalance.

2. Declining Manufacturing Competitiveness

Over the past several decades, the U.S. has experienced a decline in manufacturing competitiveness, particularly in comparison to emerging economies. Countries such as China and India have leveraged lower labor costs, efficient supply chains, and strategic government policies to become dominant players in global manufacturing. Key challenges affecting U.S. manufacturing competitiveness include:

Higher Labor Costs: U.S. wages and benefits are relatively high, making domestic production more expensive than outsourcing to lower-cost regions.
Shifting Industrial Focus: The U.S. has transitioned toward a service-based economy, with industries like technology, finance, and healthcare contributing significantly to GDP growth. As a result, manufacturing has declined as a share of total economic output, contributing to a skills gap in the labor force.
Supply Chain Vulnerabilities: U.S. manufacturing relies on complex global supply chains, with critical components sourced from overseas. Disruptions—such as geopolitical tensions, trade restrictions, or logistical challenges—can create bottlenecks, making domestic production less efficient and increasing costs. Additionally, trade disputes and barriers can limit U.S. manufacturers' access to international markets.

As a result, Americans import more goods from abroad than they export, contributing to a widening trade deficit.

Also read: Moody's downgrade sparks pushback from US Treasury

Broadening the Perspective: The Role of Global Financial Structures

3. Reserve Currency Status

The U.S. dollar (USD) plays a pivotal role in international finance as the world's primary reserve currency. Its status leads to heightened demand for dollars globally, which significantly influences U.S. trade dynamics:

Global Demand for USD: Nations around the world rely on the U.S. dollar for trade settlements, oil transactions, and foreign reserves. Because many international deals are conducted in dollars, other countries require a continuous supply of them. To meet this demand, the U.S. often imports more than it exports, resulting in trade deficits and economic imbalances that can gradually undermine confidence in its currency. This paradox, known as the Triffin Dilemma, was first introduced by Belgian-American economist Robert Triffin in 1959 during his testimony before the U.S. Congress.
Strength of the Dollar: The high demand for USD keeps its value elevated, making American exports more expensive and less competitive globally while making imports more affordable, further fueling the trade imbalance.

The reserve currency privilege provides economic benefits but also reinforces structural trade imbalances.

4. Global Investment and Capital Flows

The strength of the U.S. economy, its stable political environment, deep financial markets, strong rule of law, and the USD’s role as the global reserve currency have attracted substantial foreign investment. Major contributors to foreign capital inflows include:

Treasury Securities: Foreign governments and investors purchase large quantities of U.S. Treasuries, providing liquidity to finance government spending.
Capital Markets: U.S. capital markets are among the most robust in the world, attracting foreign investors seeking reliable returns.
Direct Investment: Many multinational corporations invest in U.S. businesses, technology, and infrastructure, further strengthening capital inflows.
While these foreign investments contribute to financial stability and economic activity, they also perpetuate the current account deficit by enabling U.S. consumption and spending beyond domestic production capacity.

Conclusion: The Interconnected Reality of the U.S. Economy

The United States' persistent current account deficit is a multifaceted issue shaped by consumer behavior, manufacturing trends, fiscal policies, and global financial structures. Its role as the issuer of the world's primary reserve currency, combined with its reliance on foreign capital, creates an economic dynamic that sustains this imbalance. This system reflects the broader complexities of international trade and investment.

Prof Xu Peng is Professor of Management Practice in Finance, and Associate Academic Director, Master in Finance at ESSEC Business School Asia Pacific