Trade deficits, excess savings, and $ policy

October 31st, 2016 at 11:27 am

Over at the WaPo today, I’ve got a piece that looks at a key contributor to our large and economically distorting trade deficits: savings gluts in East Asian countries. Riffing off of an important new paper by economist Brad Setser, I argue that as long as these countries suppress spending relative to savings, it will be very hard to bring down our trade deficits.

The question is, what is the policy agenda to accomplish this goal?

Setser outlines a granular, country specific set of ideas for these countries to consume and invest more of their excess savings internally, in health care, anti-poverty programs, more progressive fiscal policies, and old-age pensions. But as I note, he’s realistic as to how heavy a lift it is to nudge other countries away from short-term mercantilist strategies toward longer-run internal investment/consumption strategies.

I did want to extend one bit of my rap in the WaPo piece—the bit about trade deals. I touted my work with Lori Wallach on the “new rules of the road” but suggested that while bringing these macro issues into the negotiations is very important, it’s not obvious that trade deals can’t accomplish the goal of reduced external imbalances either.

There is, however, one thing in this space that could make a positive difference: enforceable rules against currency manipulation. One way countries make the play Setser writes about is by using their surplus dollars to buy dollar-denominated assets, thereby boosting the value of our currency relative to theirs (and making our exports to them expensive relative to theirs to us). Taking concrete action against this play would block a prime motivation for maintaining large trade surpluses.

How do you block currency manipulation? Many ideas abound, including countervailing tariffs and—my preferred approach—reciprocity: disallow one-way purchases of foreign exchange. IE, if a country can buy dollars, we must be able to buy their currency, essentially sterilizing their attempted manipulation.

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One comment in reply to "Trade deficits, excess savings, and $ policy"

  1. Smith says:

    Ok, sorry to repeat, but the U.S. trade deficit is Japanese and German cars, Saudi oil (despite fracking), Mexico (see also cars, oil), China (all things manufactured). If you can’t figure out trade with Japan and Germany, which are nearly U.S. territories, at least in defense terms (trip wire 100,000 troops, see also South Korea), then everything else is hopeless. Likewise why not focus specifically on Mexico first? Also Ireland stands out due to small population has largest per capita imbalance and huge deficit in absolute terms.
    Go here, sort by trade balance:

    Just Say No, no new trade agreements, just the opposite of conventional wisdom, China doesn’t deserve most favored nation status.
    An international movement to reduce trade through boycott, divest, and sanction of countries without basic freedoms and labor rights is urgent (for U.S that would be China and Saudi Arabia, but Mexico is hardly free to organize/unionize)
    Ok to do gradually, or with tariffs, but incrementally.
    Japan and Germany are problematic due to U.S. auto company management failures. Americans willingly pay premiums for Japanese reliability, German engineering, and foreign fuel economy, while Americans can’t sell them outsized Mini-vans, SUVs and pickups.
    Where do the German and Japanese saved dollars go? How to get them to spend?
    This question needs further research (or googling), anyone?
    One idea would be to lead by example, America without stagnation might gallop ahead and prod proud Germans and Japanese to spend. That won’t happen while we give away the store to China. Reduced trade is ok. The answer that trade will grow and must grow is incorrect, doesn’t help the average American, yet dooms the U.S. to a race to the bottom, economically, and more frightening, politically. China grows and it’s incorrect to assert assume it will become a liberal democracy, instead of the opposite, it’s influence on the world predominates.