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.