America's Trade Deficit Begins at Home

Steve Roach below is repeating an old, standard argument. It sells well with economists, and is true as far as it goes. But it assumes that the action in the identity equation is all one way – from low savings to high imports. But since in principle the action in an equation can be both ways, one could also argue that high imports causes low savings. This has to be mathematically true because the equation is an identity. I think the truth stays sort of in the middle, but the biggest story has been: 1) MNCs’ talking advantage of globalization; 2) the opening of China and 3) the scarce motivation toward manufacturing in a finance dominated U.S. management culture. The globalization architecture has been established in such a way as to draw manufacturing and technology out of the U.S. and for the U.S. to be the buyer of last resort. At the same time, the geo-political structure is based on having the U.S. pay for everyone’s security. As long as the dollar is the main reserved currency and the U.S. can borrow in its own currency, these structures will be maintained.

Alberto Forchielli

April 25, 2016  


America’s Trade Deficit Begins at Home

By Stephen Roach

NEW HAVEN – Thanks to fear mongering on the US presidential campaign trail, the trade debate and its impact on American workers is being distorted at both ends of the political spectrum. From China bashing on the right to the backlash against the Trans-Pacific Partnership (TPP) on the left, politicians of both parties have mischaracterized foreign trade as America’s greatest economic threat.

In 2015, the United States had trade deficits with 101 different countries – a multilateral trade deficit, in the jargon of economics.  But this cannot be pinned on one or two bad actors, as politicians invariably put it. Yes, China – everyone’s favorite scapegoat – accounts for the biggest portion of this imbalance. But the combined deficits of the other 100 countries are even larger.

What the candidates won’t tell the American people is that the trade deficit and the pressures it places on hard-pressed middle-class workers stem from problems made at home.  In fact the real reason the US has a massive multilateral trade imbalance is that Americans don’t save.


America ran trade deficits with 101 nations in 2015 – a multilateral imbalance that reflects an unprecedented shortfall in domestic US saving.


Total US saving – the sum total of the saving of families, businesses, and the government sector – amounted to just 2.6% of national income in the fourth quarter of 2015. That is a 0.6-percentage-point drop from a year earlier and less than half the 6.3% average that prevailed during the final three decades of the twentieth century.

Any basic economics course stresses the ironclad accounting identity that saving must equal investment at each and every point in time. Without saving, investing in the future is all but impossible.

And yet that’s the position in which the US currently finds itself. Indeed, the saving numbers cited above are “net” of depreciation – meaning that they measure the saving available to fund new capacity rather than the replacement of worn-out facilities.  Unfortunately, that is precisely what America is lacking.

So why is this relevant for the trade debate? In order to keep growing, the United States must import surplus saving from abroad.  As the world’s greatest economic power and issuer of what is essentially the global reserve currency, America has had no trouble – at least not yet – attracting the foreign capital it needs to compensate for a shortfall of domestic saving.

But there is a critical twist: To import foreign saving, the US must run a massive international balance-of-payments deficit. The mirror image of America’s saving shortfall is its current-account deficit, which has averaged 2.6% of GDP since 1980.

It is this chronic current-account gap that drives the multilateral trade deficit with 101 countries.  To borrow from abroad, America must give its trading partners something in return for their capital: US demand for products made overseas.


Without fixing the US saving problem, trade diversion through tariffs or TPP would shift external production to higher-cost foreign producers – a tax hike on middle-class American families.


Therein lies the catch to the politicization of America’s trade problems. Closing down trade with China, as Donald Trump would effectively do with his proposed 45% tariff on Chinese products sold in the US, would backfire. Without fixing the saving problem, the Chinese share of America’s multilateral trade imbalance would simply be redistributed to other countries – most likely to higher-cost producers.

I have estimated that Chinese labor compensation rates remain far less than half of those prevailing in America’s other top-ten foreign suppliers. If those countries were to fill the void left by a Trump-like penalty on China, higher-cost producers would undoubtedly charge more than China for products sold in the US. The resulting increase in import prices would be an effective tax hike on the American middle class. That underscores the futility of attempting to find a bilateral solution for a multilateral problem.

The same perverse outcome could be expected from reckless fiscal policies proposed by other politicians.  Take, for example, the ten-year $14.5 trillion federal government spending binge proposed by Democratic presidential candidate Bernie Sanders – a program judged to be without any semblance of fiscal integrity by leading economic advisers within the very party whose nomination he seeks.


China bashing from the right and the TPP backlash from the left are politically driven foils that deflect attention away from federal budget deficit reduction and other pro-saving policies.


Government budget deficits have long accounted for the largest share of America’s seemingly chronic saving shortfall. The added deficits of Sandersnomics, or for that matter deficits of any other politician, would further depress America’s national saving – thereby exacerbating the multilateral trade imbalance that puts such acute pressure on middle-class families.

Seen through the same lens, mega trade deals, such as the TPP, would also have an important bearing on pressures that squeeze American workers. TPP would effectively divert trade flows from those countries that are not a part of the agreement to those that are. With China excluded from TPP, the same phenomenon noted above would result: American middle-class families would be taxed by the diversion of trade away from low-cost non-TPP producers such as China toward higher-cost TPP signatories such as Japan, Canada, and Australia.

In short, trade bashing is a foil for the vacuous promises that politicians of both parties have long made to American voters. Saving is the seed corn of economic growth – the means to boost American competiveness by investing in people, infrastructure, technology, and new manufacturing capacity. Washington, through decades of deficit spending and advocacy of policies that encourage households to consume rather than save, has forced America to rely on foreign saving for far too long.  This has undermined US competiveness, punishing workers with the job losses and wage compression that trade deficits invariably spawn.

America’s 101 trade deficits don’t exist in a vacuum. They are a symptom of a far deeper problem, a US economy that has lived beyond its means for decades. Saving is but a means to an end – in this case the sustenance of a thriving and secure middle class. Without saving, the American Dream is in danger of becoming a nightmare.  The trade debate of Campaign 2016 heightens that very risk.

Stephen S. Roach, a faculty member at Yale University and former Chairman of Morgan Stanley Asia, is the author of Unbalanced: The Codependency of America and China (2014).


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