Trump’s $16 Trillion Trade Blind Spot
Convinced of an easy victory, Donald Trump has launched a global tariff war aimed at reducing the US trade deficit. But while Trump is fixated on imported goods, he is overlooking the much larger role that services, intellectual property, and investment play in sustaining America’s global economic dominance.
Ricardo Hausmann
CAMBRIDGE – In August 1914, Europeans saw little value in the century of peace that had followed Napoleon’s defeat at Waterloo.
As historian Barbara W. Tuchman recounted in her 1962 book The Guns of August, public sentiment in Berlin, Paris, London, and Vienna was swept up by a wave of collective euphoria – a feverish excitement over the expected benefits of a swift and decisive world war.
The result was four years of misery and devastation.
A similar sense of misguided bravado seems to pervade US President Donald Trump’s administration as it moves ahead with its reckless assault on the global security and trade order of the past 80 years.
Convinced of an inevitable and easy victory, Trump has unilaterally declared war on the postwar order, failing to heed the lesson of Field Marshal Helmuth von Moltke the Elder, the military architect behind Prussia’s 1870-71 victory over France: No battle plan survives first contact with the enemy.
At first glance, the United States appears well-positioned to win Trump’s trade war against China and key trading partners like Canada, Mexico, and the European Union.
In his public remarks, Trump often fixates on America’s large trade deficit in goods, which reached a record $1.2 trillion in 2024.
According to him, the trade deficit is irrefutable proof that the US is being treated “very, very unfairly, very badly.”
Because it imports more than it exports, the US has more foreign goods to tax than exports vulnerable to retaliation.
Trump aims to leverage this strategic advantage by using tariffs – the “most beautiful word in the dictionary,” as he once put it – to pressure firms operating in Canada, Mexico, and China to move production to US soil, thereby eliminating the trade deficit.
Given that most of America’s trading partners depend on access to the US market, Trump believes it can flex its economic muscle and force rivals into submission.
But trade is not a battlefield, and economic leverage in one area does not necessarily translate into easy victories elsewhere.
The fundamental flaw in Trump’s strategy is that it focuses on the trade deficit in goods while overlooking the much larger role that services, intellectual property, and investment play in the global economy.
This myopic perspective makes the US vulnerable to countermeasures that could undermine the very advantages it takes for granted.
The textbook critique of Trump’s trade agenda is that, sooner or later, he will recognize that producing goods in the US raises costs, hurts consumers, and erodes the competitiveness of American exports.
But this argument overlooks a crucial detail: America’s economic ties to the rest of the world go far beyond goods.
Services and investments are equally – if not more – important.
And if that’s where its advantages and potential vulnerabilities lie, there is little reason for other countries to retaliate with tariffs.
Notably, the US runs a sizable surplus in services, totaling $278 billion in 2023, driven by industries like finance, telecommunications, digital trade, high-value business services, and the licensing of American patents and copyrights.
And even that figure reflects only direct sales from the US to foreign consumers.
In reality, most large US companies operate abroad through foreign subsidiaries.
In 2024, profits from overseas operations amounted to $632 billion.
When these earnings are taken into account, America’s invisible trade surplus approaches $1 trillion.
Moreover, US-based companies like Apple, Google, Microsoft, Facebook, Nvidia, Johnson & Johnson, and Tesla leverage their innovation-based market power to extract rents from consumers and businesses around the world.
If these firms were hit with the equivalent of a tariff, they would not be able to pass the cost on to their customers abroad.
After all, if they could raise prices without losing profits, they would have already done so.
If we multiply American companies’ foreign earnings by 26 – the average price-to-earnings ratio of S&P 500 firms – the value of US investments abroad can be estimated at $16.4 trillion.
By contrast, foreign companies operating in the US earned just $347 billion in 2024.
In effect, America’s surplus in services and foreign equity income nearly offsets its trade deficit in goods.
That makes its $16.4 trillion in foreign assets a far more attractive target for retaliation than tariffs on US exports.
America’s technological and intellectual-property (IP) dominance, which underpins its massive services surplus and equity income, is not coincidental.
It is rooted in the postwar international order – particularly the grand bargain the international community struck in 1994 during the so-called Uruguay Round of trade negotiations.
Under the resulting Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), developing countries committed to enforcing advanced economies’ IP protections in exchange for market access.
As recent research shows, TRIPS has imposed significant costs on most developing countries.
Still, they accepted it as the price of gaining greater access to Western markets.
But if the US is now seen as reneging on its end of the bargain, why should emerging economies uphold theirs?
Many countries would have an incentive to challenge the TRIPS agreement, perhaps even coordinating efforts to weaken or abandon it altogether, putting IP-intensive industries like tech, pharmaceuticals, and entertainment at risk.
While the debate in the US and abroad is focused on tariffs and their impact on prices and exports, other countries will soon begin to wonder whether protecting America’s most valuable economic assets – its IP and the global mechanisms that allow it to be monetized – still serves their interests.
When those protections begin to be eroded, maybe – just maybe – Trump and his acolytes will come to see that the multilateral order wasn’t so unfair after all, and perhaps not worth tearing down.
Ricardo Hausmann, a former minister of planning of Venezuela and former chief economist at the Inter-American Development Bank, is a professor at Harvard Kennedy School and Director of the Harvard Growth Lab.
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