Trade reports are like oceans. Much of the action happens beneath the surface.
That is the lesson of today’s trade report, which showed a rising deficit in May, albeit one that came in narrower than expectations. The U.S. goods and services trade deficit rose to $77.6 billion. The goods deficit widened to $106.5 billion. Exports fell, imports rose, and net exports now appear likely to subtract modestly from second-quarter GDP growth.
On the surface, that looks like a setback. But the deeper currents tell a more complicated — and more important — story. Let’s start with this hat trick of records.
#1: Services: American services exports hit a record $107.1 billion in May. Services imports also hit a record, but the United States still ran a strong services surplus of $28.9 billion. That is a reminder of one enduring American advantage: high-value services, finance, technology, logistics, intellectual property, travel, and professional expertise remain major export engines.
#2: Energy. Petroleum exports rose to a record $38.4 billion. In a world where hostile regimes weaponize oil, gas, and shipping lanes, record American petroleum exports are not merely a trade statistic. They are a national-security asset. Every additional barrel America sells abroad strengthens allies, weakens adversaries, and improves the strategic balance in energy markets.
#3: Capital goods. Imports of capital goods, including machinery, equipment, production systems, and the tools businesses use to build factories, automate production, expand capacity, and raise productivity, reached a record $128 billion. Here, serious trade analysis must distinguish between imports that hollow out American workers and imports that equip American factories.
A subsidized consumer good that displaces an American worker is industrial erosion. An advanced machine tool imported to expand production in Ohio, Texas, Arizona, Pennsylvania, or South Carolina can be part of an industrial comeback. And what we are seeing in the data are the seeds of reindustrialization.
There are also warning lights, and they are serious. The record goods deficits with Mexico, Vietnam, and Malaysia deserve close scrutiny. In a world now sorted into higher and lower tariff countries, too many lower tariff countries have become staging grounds for tariff evasion, country-of-origin games, and transshipment from higher tariff countries.
The Great Transshipment Scam is real. The more the United States tightens the screws on countries like China, the more these countries look for back doors into the American market.
That is where enforcement becomes just as important as tariff rates. A tariff without rules-of-origin enforcement is an invitation to cheat. A tariff without customs scrutiny is a tollbooth with no collector. A tariff without penalties for transshipment is not a wall. It is a curtain.
Against the backdrop of USMCA discussions, Mexico’s record deficit is especially important. Mexico should be a North American production partner, not a tariff shelter for third-country industrial strategies. In autos alone, Japanese, German, and Korean automakers use Mexican assembly plants to ship well over one million vehicles a year into the U.S. market. In steel and auto parts, the same concern arises through foreign-owned supply chains embedded in Mexico’s manufacturing base.
The issue is not Mexican production per se. The issue is whether USMCA is building genuine North American value added — or allowing non-North American capital, components, steel, and subsidies to enter the American market through a lower-tariff side door. Mexico’s record deficit points in the wrong direction.
The record deficits of Malaysia and Vietnam raise the same question. The issue is not trade with these countries per se. The issue is whether their export surges reflect genuine domestic value added or, with these Southeast Asian nations, Chinese components, Chinese subsidies, Chinese capital, and Chinese goods wearing a different flag.
The Trump trade strategy is designed precisely to sort this out. Tariffs change incentives. Tax policy encourages domestic investment. Enforcement blocks evasion. Rules of origin separate true partners from conduits.
The goal is not autarky. The goal is production at home, fair trade abroad, and an end to the one-way bleeding of America’s industrial base.
The May trade report shows all three realities at once. The headline deficit widened. America’s services and energy engines remain strong. Record capital-goods imports are planting the seeds of America’s reindustrialization. But record deficits with key transshipment platforms show substantial leaks in the boat that have to be plugged.
So the policy response is not retreat. It is resolve.
Keep exporting energy. Keep expanding high-value services. Keep importing the machinery needed to rebuild American industry. But crack down hard on the transshipment networks that let higher tariff countries like China use Mexico, Vietnam, Malaysia, South Korea, and others as back doors into the American market.
