Opinion: Trumpian mercantilism, meet basic arithmetic

U.S. President Donald Trump disembarks from the Marine One helicopter after arriving at Chequers, the official country residence of Britain's Prime Minister, in Aylesbury, central England, on September 18, 2025. Photo by LEON NEAL/POOL/AFP via Getty Images

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This summer, the Trump administration announced trade deals with Japan and the European Union (EU). Each involved lower barriers to U.S. exports, more foreign direct investment (FDI) into the U.S., and higher U.S. tariffs on EU and Japanese goods. The U.S. looked like it was winning on all fronts.

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According to the White House, Japan pledged US$550 billion in new investments in U.S. projects and also agreed to increase its purchases of specific U.S. products. The EU deal included US$750 billion in purchases of U.S. energy exports and US$600 billion in planned investments in the U.S. by EU companies. Meanwhile, U.S. tariffs on both partners jumped from around 1.5 per cent to 15 per cent.

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It’s textbook mercantilism — a revival of the 18th-century belief that wealth comes from exporting more than you import. But there’s a problem: it fails the test of basic arithmetic.

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The Trump administration wants the U.S. to run a trade surplus and at the same time attract foreign investment. But both economic theory and accounting rules say that if you run a trade surplus, you’re going to be a foreign investor yourself, not a recipient of FDI. You have to be: all that foreign money flowing in via your trade surplus has to go somewhere.

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The balance of payments, the ledger that tracks a country’s transactions with the rest of the world, is governed by an unbreakable accounting identity: the “current account” and the “capital account” must balance. The current account consists mostly of the trade balance and the net returns to existing investments, i.e., interest and other payments flowing into or out of your country. The capital account consists of net new investment flows. If you’re lending, i.e., acquiring assets, your capital account is positive. If you’re borrowing, it’s negative.

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As economists put it, the balance of payments always balances. If you’ve got a negative balance (a “deficit”) on the current account, your capital account is going to be positive. And vice versa. So if the U.S. runs a trade surplus, it must be acquiring claims on foreigners, i.e. exporting capital. Conversely, if the U.S. imports more than it sells, then that means foreigners are acquiring claims on it, that is, investing more in the U.S. than the other way around. All the dollars flowing out of the U.S. via the trade deficit have to come back in somehow, and foreigners investing in the U.S. is generally how.

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The Trump administration wants to improve both balances at once. But it can’t do that. That’s not ideology — it’s accounting. If the U.S. is running a trade surplus, its total net claims on foreigners, including FDI and financial assets, must be increasing. Yes, strictly speaking, FDI into the U.S. could increase while the U.S. acquires an even larger sum of foreign financial assets, but that’s unlikely. The U.S. just passed a “big, beautiful” budget bill that will add more than $3.4 trillion to the federal deficit over the next decade. The U.S. government is going to be borrowing huge amounts of money for a long time to come, including from foreigners. The U.S. private sector isn’t likely to generate surpluses large enough to lend so much to foreigners that it offsets a U.S. trade surplus, plus FDI into the U.S., plus all the extra borrowing the federal government will be doing.

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Like the White Queen in Alice Through the Looking Glass, one can wish for six impossible things before breakfast, but that doesn’t make any of them come true.

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Steve Ambler, professor emeritus at the University of Québec at Montreal, is David Dodge chair in monetary policy at the C.D. Howe Institute. Jerzy (Jurek) Konieczny, professor emeritus at Wilfrid Laurier University, edits the Review of Economic Analysis.

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