From this perspective, the US sees itself as the victim of others’ transgressions. Japan was the culprit in the 1980s. Now it’s China. US leaders also blame the World Trade Organization, which they have effectively neutered by blocking appointments to its Appellate Body for the past five years.
Blame is about politics, not economics. Students of economics are taught almost immediately to respect a basic premise of national income accounting: that a country’s trade balance is equal to the difference between investment and saving. It follows that any savings-short economy wanting to invest and grow must borrow surplus savings from abroad, which requires balance-of-payments and trade deficits with the rest of the world.
This conceptual framework fits the US economy to a tee. In 2023, the US net domestic savings rate – the combined depreciation-adjusted savings of individuals, businesses and the government sector – was negative, at minus 0.3 per cent of national income. This has happened across multiple quarters only once before: during and immediately after the global financial crisis of 2008-09.
This leads to a politically uncomfortable verdict on trade: in keeping with national income identities, a savings-short US runs massive external deficits. In 2023, the current-account deficit was equivalent to about 3 per cent of GDP, and the merchandise trade deficit was 3.9 per cent of GDP.
Blaming others for this problem is a cop-out. Without a shortfall of domestic savings, there would be no trade deficit. That shortfall is largely made at home – the result of outsize federal budget deficits which are counted as negative savings in the national income accounts.
After ballooning during the Covid-19 pandemic to more than 14 per cent of GDP, the budget deficit remained stuck at more than 5 per cent of GDP in 2022-23, nearly double the average from 1962 to 2019. Moreover, the Congressional Budget Office’s baseline projections suggest that the deficit share will remain around its current level for the next decade.
14:45
An unwinnable conflict? The US-China trade war, 5 years on
An unwinnable conflict? The US-China trade war, 5 years on
This outcome is not China’s fault. It is a result of conscious decisions by US politicians. Yet Trump pinned the blame for the widening US merchandise trade deficit squarely on China during the 2016 presidential campaign, seizing on the point that China’s share of the deficit had soared from 20 per cent to nearly 50 per cent between 1999 and 2015. Tariffs quickly followed Trump’s victory.
On one level, this strategy appeared to work. The tariffs shrunk China’s share of the US merchandise trade deficit by US$138.8 billion from 2018 to 2023. However, over the same period, the overall deficit grew by US$181 billion – precisely what one would expect from a country with a falling savings rate. Excluding China, the US merchandise trade deficit widened by US$319 billion from 2018 to 2023.
In other words, notwithstanding US leaders’ efforts to convince voters that they are fixing the country’s trade problems, the notion of a “China fix” rings hollow. By targeting China, all the US is doing is diverting trade away from a low-cost producer to higher-cost countries.
That is the equivalent of a tax increase on American consumers that exacerbates the added costs of Chinese tariffs. At the same time, Washington is perfectly content to run massive budget deficits that will depress domestic savings even further, leading to increased trade diversion.
01:52
US proposes new round of tariffs on China in latest trade war escalation
US proposes new round of tariffs on China in latest trade war escalation
If only the story stopped there. The trade conflict has allowed Washington to launch a full-throttle political campaign against China. Not only have national security concerns given rise to a tech war, the US has announced another round of Section 301 tariffs on Chinese goods, targeting electric vehicles, solar panels and batteries, all sectors where the US has little comparative advantage.
This will compromise US green-energy objectives at a time when the effects of climate change are increasingly apparent. Meanwhile, US complaints about China’s unfair subsidisation of its alternative energy initiatives overlook the generous US subsidies that have long benefited companies such as Tesla.
Free trade and globalisation have made the world a better place. That conclusion, which became accepted wisdom in the post-war period, is now considered heresy. The resulting incoherence of US trade policy – flailing at savings-driven trade deficits and steeped in national security fears – risks making the world a worse place.
Global stewardship is in tatters, and the dangers of superpower conflict are now painfully reminiscent of the 1930s.
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 and Accidental Conflict: America, China, and the Clash of False Narratives. Copyright:Project Syndicate
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