How does our national savings rate impact our trade deficit?

Some economists claim U.S. trade deficits are caused by the low savings rate of Americans. But mainstream trade journals continue to assert that trade deficits don’t really matter.

On June 20, 2017, the Coalition for a Prosperous America released a research paper, “Do Savings Rates Cause Trade Deficits?” by CEO Michael Stumo and Research Director Jeff Ferry that shows why globalist economists are wrong about what causes trade deficits, offshoring and job losses.

They write, “A popular, but misleading, claim is that low U.S. savings, relative to investment, causes our trade deficit. For example, Harvard professor and former Reagan administration advisor Martin Feldstein has said that the U.S. fiscal deficit, which indeed reduces national savings, is the cause of the trade deficit. ‘If a country consumes more than it produces, it must import more than it exports.’”

Other economists view the issue of trade deficits with a different lens. They say that America is exporting its paper money for goods made in China and other countries that need reserve currencies such as dollars, to purchase raw materials from other countries.

The traditional macroeconomics equation of basic Gross Domestic Product does not reflect the issue of currency markets or exchange rates. For instance the recent tax cut Trump instituted in the American economy places the GDP to debt ratio at 106% which inflates the value of the dollar or undervalues the dollar reserves many countries are already holding. In contrast the EU has a GDP to debt ratio of 81% making it a more desirable reserve currency.

Everybody agrees that reform is needed in currency exchange markets and not only in merchandise trade markets for as long as budget deficits and national debt continue to rise, specially, in the USA for its dollar preferred place in the world as a reserve currency retracts while other currencies begin to displace it.

These real-world changes directly impact one or more variables within the identity GDP equation, transmitted through by mathematical necessity. In short, national savings is related to the trade deficit in an accounting sense but it is not its causation.

The relationship between savings and trade deficits can be best explained in a mathematical accounting identity but this do not reflect the causal relationships between savings, investment, and trade flows. A merchandise trade deficit reduces the incomes of domestic workers however; exporting paper money reduces the cost of imports which benefits the lower income brackets.

In 2005, the Federal Reserve Board chairman Ben Bernanke argued that “the large and growing U.S. current account deficit is caused not by anything happening in the U.S., but by decisions taken by emerging economy nations to run very high savings rates, pursue export-led growth, and lend money to other countries, especially the U.S. He called the situation a global savings glut. These excessive inflows of foreign savings raise the U.S. dollar exchange rate, drive down our interest rates, and force our economy into a trade deficit.”

Tactics of Surplus Producing Countries Use

Many authors agree that “Export-oriented or investment-oriented countries can utilize domestic and foreign policies to reduce consumption, increase production and export at very competitive prices.”

In the case of China:

Wage growth is constrained to below the growth of worker productivity

Undervalued exchange rate

Government subsidizes to Chinese manufacturers

Vast amounts of surplus labor that produces more than it consumes

Unethical accounting practices for valuation and investment