Introduction
For decades, the bedrock of the United States’ economic and geopolitical strength has been its ability to export intangible assets such as ideas, technologies, and expertise. However, President Donald Trump’s trade policies now threaten to dismantle the very system that has sustained a century of American prosperity.
Misconceptions and the Trump Trade Policy
Similar to the Salem witch trials of 1692-1693, where people were unjustly executed based on a false understanding of the world, a comparable misconception is shaping US economic policy today. Trump’s “reciprocal” tariffs stem from the belief that the US suffers from significant trade deficits, which reflect economic decline and foreign exploitation. This narrative, based on flawed accounting, now threatens to undermine both American prosperity and the international order that supports it.
The US Trade Deficit: A Closer Look
According to traditional accounting standards, the US recorded an accumulated current account deficit of $14.4 trillion between 2000 and 2024. At first glance, this suggests a nation living beyond its means. If this deficit were financed through loans at an average interest rate of 4%, net interest payments should have increased by $576 billion. However, during the same period, net financial income only decreased by $19 billion.
Where are the missing $557 billion? A more detailed analysis reveals that the gap reflects an often-overlooked US strength: the ability to generate value through ideas, technological innovation, and expertise. These intangible assets sustain a global network of subsidiaries, consistently generating sufficient returns to offset the current account deficit.
US Trade Balance: Services and Foreign Subsidiaries
In 2024, the US reported a merchandise trade deficit of $1.2 trillion but also recorded a service surplus of $295 billion. More significantly, US subsidiaries abroad generated $2.1 trillion in sales, compared to the $1.5 trillion in sales by foreign subsidiaries operating in the US. The result was a net service surplus of $895 billion, nearly enough to offset the goods deficit.
Foreign subsidiaries of US companies also generated $632 billion in net income in 2024 alone, assuming a conservative 4% return rate. This implies an asset base of $15.8 trillion, a staggering figure for a nation reportedly running an accumulated current account deficit of $14.4 trillion.
The “Dark Matter” of US Economic Strength
To understand this apparent contradiction, consider an alternative narrative: the US borrowed not $14.4 trillion but $28 trillion. Half was allocated to domestic spending, while the other half financed foreign direct investment.
The crucial distinction lies in how US companies utilized these funds. By combining capital with intangible assets like ideas, intellectual property, and organizational capabilities, they generated an 8% return—significantly higher than the 4% typically earned by passive investors, including foreign lenders.
Essentially, the US exports not just dollars but an invisible form of capital that serves as a reliable income source. In 2005, my colleague Federico Sturzenegger and I coined the term “dark matter” to describe the unmeasured inherent value of knowledge-based assets that traditional accounting fails to capture.
The Threat to the US Economic Model
This structural dynamic has long allowed the US to maintain persistent trade deficits without typical consequences, such as rising interest payments. Since the end of World War II—and more explicitly since the 1994 Uruguay Round trade negotiations—the US has led efforts to institutionalize the protection of cross-border investment and intellectual property. In exchange, developing countries gained greater access to US capital and consumer markets.
However, this foundation of American power is now at risk. Trump’s “Liberation Day” tariffs are not merely symbolic; they signal a willingness to abandon the principles that have underpinned global trade and investment for decades. If the US is perceived as backing away from its commitment to open markets, other countries might respond by reducing protections for intellectual property. The profits of large US companies, especially in technology, pharmaceuticals, and entertainment, could face higher taxes, stricter regulations, or even expropriation. As a result, the income that helps offset the US current account deficit could disappear.
Broader Consequences of Trump’s Agenda
The damage from Trump’s agenda extends far beyond trade. The strength of the US economic model has always resided in its openness to people, capital, and ideas. For decades, the US has been a magnet for scientific and technological talent, from European emigrants who helped build the atomic bomb to current AI researchers and biotech entrepreneurs.
However, as the US retreats inward—attacking universities, undermining research, and closing off to the world—it is destroying the knowledge base that generates the “dark matter” sustaining its external equilibrium.
Geopolitical consequences could be profound. US allies like Canada and the EU are protecting themselves against Trump’s unpredictability by strengthening ties with China, while Latin American countries are following suit. China is working to reduce its reliance on the US market, and universities worldwide are courting American academics and researchers.
If the US is no longer seen as a reliable guarantor of an international order based on norms, it risks falling into strategic isolation.
Lessons from History
History offers valuable lessons about the dangers of Trump’s approach. Early 20th-century German Emperor Wilhelm II dismantled the carefully constructed alliance system of Chancellor Otto von Bismarck, dismissing it as outdated. By unilaterally asserting himself, Wilhelm II ultimately led to Germany’s isolation and set the stage for World War I. He failed to recognize that what appeared as limitations were, in fact, the foundation of Germany’s security and influence.
Trump is making a similar mistake. By viewing the current trade and investment system as a trap rather than a triumph, he is determined to dismantle the mechanisms that have allowed the US to prosper, extend its influence, and avoid great power conflicts for nearly a century.
The decline of American power is not inevitable. However, misinterpreting the causes of the US trade deficit and attempting to fix what is not broken risks turning an illusory statistical issue into a very real crisis.
