E Trump Plays The Blame Game On U.S. Trade Deficits

Last month, President Donald Trump ordered a comprehensive study to identify every form of “trade abuse” that contributes to the U.S. trade deficits. The study will examine “country by country and product by product” trade practices and is aimed at identifying the reasons for the large and persistent U.S. trade deficit, according to statements by Commerce Secretary Ross. It is easy to blame the large trade deficit on foreign governments that block the sale of US products into their markets. It is also easy to blame foreign governments that subsidize their exports to the United States. Although the U.S. trade deficit has moderated considerably over the past decade, it equals about 2.5 per cent of GDP or $450 billion annually (Chart 1).

Chart 1 U.S. Trade Deficit as Per Cent of GDP

Foreign import barriers and exports subsidies are not the reason for the US trade deficit. Going on a hunt for violators of trade agreements does nothing to address the real reason. The overall trade deficit is the result of the saving and investment decisions of US governments, households and businesses. Whether the Trump administration is successful in forcing its trading partners to open up their domestic markets or to curtail exports to the United States will not change the overall balance of trade. That change can only come about by a change in U.S. savings/investment decisions. How the deficit is allocated among the 100 countries that trade with the United States is a matter of specific trade practices, but that does nothing to alter the fact that the United States continues to have trade deficits.

Americans’ savings and investment decisions determine the size of the trade deficit. If a country saves more of total output than it invests in business equipment and structures, it has extra output to sell to the rest of the world. This is the case of China which produces far more than it consumes and hence it generates huge net savings rates— as high 25 per cent of GDP (Chart 2) The United States, by comparison, has a net savings rate of 3 per cent. That rate is insufficient to fund its investment needs, hence the importance of drawing upon savings from abroad.