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Right way for US to rebalance trade

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The US-China trade dispute could reshape the world’s economic and financial landscape. That’s not how it looked as recently as May, when a bilateral trade deal was almost within reach. But the United States backed out at the eleventh hour and tensions have since flared, with the US administration imposing tariffs on a wide range of Chinese exports and China responding in kind.

With an unprecedented $600 billion worth of goods potentially affected, it is worth considering how useful tariffs really are for correcting current account imbalances, which is the US administration’s stated goal. Most economists view trade from a multilateral perspective, focusing on an economy’s overall balance with the rest of the world. And the US has been running overall trade deficits since 1976.

The US deficit peaked at 5.5 percent of gross domestic product (GDP) in 2006, but it usually has been around 3 percent of GDP. At $552 billion in 2017, it is the world’s largest deficit in absolute terms. Deficits rise when a country spends more than it produces, which means they are rooted not so much in trade as in domestic savings and investment behavior. In the US, investment accounts for 21 percent of GDP, in keeping with the average across advanced economies (22 percent), whereas savings account for less than 19 percent, which is far below that of the US’ peers.

US low savings rate root cause of deficits

The US savings rate reflects both public and private sector behavior. The personal savings rate was as low as 3 percent in the run-up to the 2008 financial crisis, after which it edged up to 7 percent a rate still far below that of the early 1990s.

Besides, the public sector has historically saved even less. The US has had a federal budget surplus in only five of the last 50 years, and it has maintained deficits averaging more than 4 percent of GDP since 2002. This year, the deficit has risen by 17 percent on the back of tax cuts and increased defense spending, further dampening public savings.

Underlying the low US savings rate is the dollar’s status as the main global reserve currency. The dollar’s dominance confers on the US what Valéry Giscard D’Estaing, as French finance minister, famously dubbed an “exorbitant privilege,” insofar as it allows the US to finance its deficits with little external constraint, borrowing ever more from abroad while saving less at home.

That by the end of 2017, foreigners owned half of the $12 trillion worth of privately held US Treasury securities that are currently outstanding should make that clearer.

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