“We lose $800 billion a year on trade, every year,” President Trump said in March when he announced his new tariff plan, referring to the size of the U.S. trade Deficit in goods. Trump has lamented the U.S. trade deficit repeatedly, tweeting that as a result of it, “our jobs and wealth are being given to other countries.”

The trade skirmishes that have broken out as a result have the potential of becoming a full-scale trade war of the sort that the Smoot-Hawley Tariff Act of 1930 started, which is widely credited with either triggering or deepening the Great Depression.

But what is the trade deficit, and what causes it? And is it a bad thing?

For decades, the U.S. has run a deficit in the trade of goods — in other words, importing more goods than it exports. The dominant narrative is that the steadily increasing U.S. “trade deficit” is a function of two things: (1) the availability of cheaper labor overseas and (2) the unbridled consumption habits of Americans. As a consequence, the narrative goes, the U.S. has had to import increasing amounts of Capital from investments by foreign governments, businesses, and individuals to “fund the trade deficit,” thus becoming a debtor nation.

Although this is a compelling narrative, there is in fact no evidence to support the conclusion that a deficit in traded goods causes a net import of capital. It is true that there is plenty of evidence that these two things happen together, but that simply confirms macroeconomic measurement convention, according to which three components of a country’s balance of payments must sum to zero: a country’s balance in the trade of goods, its balance in the trade of services, and its balance of capital inflows/outflows. So, if trading in goods and services is collectively in deficit, then capital inflows must be positive by an equal amount. But that statement does not affirm that the trading deficit causes the capital inflow. It could equally be true that the inflow causes the trading deficit.

So which causes which? It is not possible to tell for certain. It is, however, instructive to remember that the last time America ran a persistent and sizable (relative to the economy at the time) goods trade surplus was when it was exporting vast amounts of capital to Europe to fund the Marshall Plan after World World II.

Do a little thought experiment: Imagine that your country is the world’s most attractive country in which to invest capital, because it has the biggest and richest market in the world, and the world’s most used and tradable currency, and it is scrupulous about protecting the rights of investors. Imagine further that its advanced economy is leading the world in the transition to a service-based economy, and as a result, it runs the world’s biggest services trade surplus — by a factor of more than two over the next biggest surplus in the world.

Per standard macroeconomic theory, this imaginary country would run the world’s biggest deficit in traded goods. And it would have absolutely nothing to do with its being uncompetitive or its people profligate. It can’t be the best place to invest and the best service exporter without running a huge goods trade deficit. (Because, remember, all three things have to sum to zero.) Well, the mystery country is, of course, the U.S. — and the U.S. trade deficit, according to this argument, is a logical consequence of America’s success and superior know-how relative to other countries. On this basis, the trade deficit should be something to brag about rather than denounce.

In an inflows-causes-deficits narrative, the trigger for the rise in the U.S. trade deficit is not cheap overseas labor or American profligacy. Rather, it is President Nixon’s 1971 decision to take the U.S. off of the gold standard and end the postwar Bretton Woods period of fixed exchange rates. That decision launched what has turned out to be a nearly half-century period of upward-trending deficits in the trade of goods with other nations. What President Nixon could never have guessed is that when he triggered the end of Bretton Woods, he made it much more important for global investors to choose wisely when deciding where to invest their capital internationally.

Prior to August 15, 1971, it didn’t matter as much because your currency was fixed against the U.S. currency, and the U.S. promised to give you one ounce of gold if you used your currency to buy $35. So, you could invest in France and not have to worry about your francs becoming worth less in U.S. dollars than when you first invested. After 1971 it was really helpful to invest your capital in the most robust and open market in the world, and the world’s investors have increasingly figured that market is the U.S. — not Japan with its shrinking population, or China with its rampant corruption, or Europe with its economic sclerosis.

Since 2000 the U.S. has received, on average, a net capital inflow of over half a trillion — per year! And to put more upward pressure on the goods trade balance, the U.S. services trade balance, which was trivial as late as 1985, is now in the neighborhood of one-quarter of $1 trillion dollars per year.

Don’t get me wrong: I am 100% supportive of going after unfair trade practices. For example, it is truly ridiculous that Japan erects such an incredible array of barriers to U.S. car imports that GM and Ford have all but given up attempting to sell vehicles in Japan, while Toyota, Honda, and Nissan import millions of vehicles a year profitably into the open U.S. market.

However, if the U.S. economy keeps growing at 3%–4% a year with close to zero structural unemployment, nothing that President Trump accomplishes on the front of making trade fairer for U.S. goods exporters will do a thing to reduce the U.S. deficit in traded goods, which is his avowed goal. In 2017 robust U.S. economic growth widened the capital flow surplus — and unsurprisingly, the goods trade deficit widened in step.

If President Trump actually wants to decrease the goods trade deficit, he would need to take a page from the presidencies of Jimmy Carter and George H.W. Bush. In the post-1971 era, they were the presidents who were the most successful in reducing the goods trade deficit. Both accomplished that feat by inheriting a U.S. economy doing reasonably-to-very well and leaving it performing considerably worse, making it considerably less attractive to net foreign capital inflows. I suspect that is the kind of economic sacrifice President Trump would want to assiduously avoid.