The Contradiction at the Heart of Trump's Trade Deals

New York Times

2 days ago

As the dust — perhaps — starts to settle after four frenetic months of trade negotiations, the biggest win for America might be a potential windfall of investment from overseas.
In an effort to avoid even higher tariffs, Japan, the European Union and South Korea loosely pledged to directly invest a total of $1.5 trillion in the United States, equivalent to what the government spent on Social Security benefits last year. We don't know exactly when the money will arrive, or if some of it simply replaces investments that might have happened anyway. Even with a healthy haircut, the pledges sound impressive, and could be greater than the new global direct investment in the United States over the past six years.
Well before President Trump's deal-making, what's officially known as foreign direct investment has played an increasingly important role in America's economy. Today it accounts for about one in 10 American jobs and more than 16 percent of all U.S. manufacturing jobs. It brings technology and expertise (think Arizona semiconductor facilities courtesy of Taiwan) and supports American innovation, accounting for nearly 16 percent of U.S. corporate research and development. (Yes, the United States benefits from technology and knowledge transfers, just like other countries.) And in contrast to fickle stock and bond flows, this capital is sticky; most projects involve multiyear investments that provide a consistent boost to local economies.
The need for foreign cash is only going to become more urgent, since U.S. budget deficits will likely limit how much money Washington has to invest. But there's a problem for the administration. An influx of foreign investment will worsen the trade deficit, which is the opposite of Mr. Trump's stated goal. America should nonetheless take that deal.
When other countries want to buy U.S. land or buildings or invest in an American business, they need dollars. Selling foreign currencies to buy dollars pushes up the U.S. currency's value. A stronger dollar, in turn, weighs on exports by making them more expensive overseas. All else being equal, that leads to a wider trade deficit.
This is a basic economic reality: A country's current account, which includes trade in goods and services, must balance its capital account — the flow of capital across borders, such as financial assets as well as direct investments. A current account deficit necessitates a capital account surplus. Thus, if you want the benefit of foreign investment, you effectively need to accept trade deficits.
This is among the reasons it's wrongheaded to focus simply on America's bilateral trade relationships, as the White House seems to, to measure success or failure.
The United States attracts hundreds of billions in new foreign investment every year, thanks to its enormous consumer market, a deep, highly skilled labor pool, an innovative culture and an economic growth rate that often dwarfs that of its overseas peers. The advantages are clear. Americans who benefit directly (through jobs created by foreign investment) and indirectly (via returns on their retirement accounts) have more money to spend, some of which goes to imports and contributes to trade deficits. This is the environment the United States has operated in for decades.
Germany's BMW first produced vehicles in South Carolina in 1994 with a $600 million investment and 500 jobs. Since then, BMW has put some $14 billion into its South Carolina operations and now employs over 11,000 workers. The state hosts more than 1,100 operations of foreign-affiliated firms. These firms pay American workers and support U.S. G.D.P.
American policymakers want to build on this success, especially when it comes to strategic industries that would bolster national security and create manufacturing jobs by returning to the United States. How to achieve these goals isn't obvious — there will always be trade-offs.
The Biden administration tried to address this with a focus on carrots in the form of government incentives. It targeted strategically important foreign firms, such as Taiwan Semiconductor Manufacturing Company, that would support U.S. national security while creating domestic jobs.
Mr. Trump has also offered carrots, including tax breaks, less red tape and a plan to fast-track investment from approved companies. But his administration paired those carrots with sticks: higher tariff rates unless countries provided attractive deals for the United States.
Countries have responded by opening up their markets to American products and pledging to put more than a trillion dollars to work in the United States. But these wins could prove difficult to sustain if this administration keeps alienating its allies.
Consider Canada, the third-largest source of inbound foreign direct investment to the United States last year. An EY survey of dozens of Canadian chief executives released in June showed that 14 percent had stopped planned investments and 58 percent had delayed investments (domestically and abroad) in response to recent developments in geopolitical and trade policy.
Britain, another historically important investment partner for the United States, seems to be having similar doubts. A Deloitte survey released in early July found only net 2 percent of chief financial officers at major British firms saw the United States as an attractive place to invest, down from net 59 percent in late 2024. (Instead they became notably more optimistic about investing at home.)
This administration wants a manufacturing renaissance. Achieving that goal will be a lot more likely with robust foreign investment. And for that, the United States needs to keep its overseas friends and accept that smaller trade deficits may not be the optimal policy priority.
Rebecca Patterson is an economist and a senior fellow at the Council on Foreign Relations who has held senior positions at JPMorgan Chase and Bridgewater Associates.
The Times is committed to publishing a diversity of letters to the editor. We'd like to hear what you think about this or any of our articles. Here are some tips. And here's our email: [e-mail].
Follow the New York Times Opinion section on Facebook, Instagram, TikTok, Bluesky, WhatsApp and Threads.