The Asia Portfolio
America's Other 87 Deficits
Stephen S. Roach
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NEW HAVEN – The United States has a classic multilateral trade imbalance. While it runs a large trade deficit with China, it also runs deficits with 87 other countries. A multilateral deficit cannot be fixed by putting pressure on one of its bilateral components. But try telling that to America’s growing chorus of China bashers.
America’s massive trade deficit is a direct consequence of an unprecedented shortfall of domestic saving. The broadest and most meaningful measure of a country’s saving capacity is what economists call the “net national saving rate” – the combined saving of individuals, businesses, and the government. It is measured in “net” terms to strip out the depreciation associated with aging or obsolescent capacity. It provides a measure of the saving that is available to fund expansion of a country’s capital stock, and thus to sustain its economic growth.
In the US, there simply is no net saving any more. Since the fourth quarter of 2008, America’s net national saving rate has been negative – in sharp contrast to the 6.4%-of-GDP averaged over the last three decades of the twentieth century. Never before in modern history has the world’s leading economic power experienced a saving shortfall of such epic proportions.
Yet the US found a way to finesse this problem. Exploiting what Valéry Giscard d’Estaing called the “exorbitant privilege” of the world’s reserve currency, the US borrowed surplus savings from abroad on very attractive terms, running massive balance-of-payments, or current-account, deficits to attract foreign capital.
The US current account, which was last in balance in 1991, hit a record deficit of $801 billion (6% of GDP) in 2006. This gap has narrowed in the past couple of years, but much of the improvement probably reflects little more than the temporary impact of an unusually tough business cycle.
This is where America’s multilateral trade deficit enters the equation, for it has long accounted for the bulk of America’s balance-of-payments gap. Since 2000, it has made up fully 96% of the cumulative current-account shortfall.
And that is what ultimately makes the China-centric blame game so absurd. Without addressing the root of the problem – America’s chronic saving shortfall – it is ludicrous to believe that there can be a bilateral solution for a multilateral problem.
Yet that is exactly what US officials, together with many prominent economists, believe America needs. Since the trade deficit is widely thought to put pressure on US jobs and real wages, the US-China trade imbalance has come under special scrutiny in these days of great angst. Yes, China does account for the largest component of America’s multilateral trade deficit – making up 42% of the total trade gap in 2010. Conscious outsourcing and supply-chain management decisions by US multinationals play an important role in exaggerating China’s share. But that does little to let China off the hook in the eyes of Washington.
Long-standing charges of currency manipulation provide the proverbial smoking gun that US politicians – of both parties – believe justifies the imposition of steep tariffs on China’s exports to the US (which totaled $365 billion in 2010). That was precisely the argument behind the US Senate’s recent overwhelming approval of a “currency bill” that took dead aim on China.
While it may be convenient to hold others accountable for America’s problems, this is bad economics driving bad politics. In an era of open-ended US government budget deficits and chronic shortfalls in personal saving, America is doomed to suffer subpar savings and massive multilateral trade deficits for as far as the eye can see.
In that vein, closing down trade with China, while failing to address the saving shortfall, is like putting pressure on one end of a water balloon. The Chinese component of America’s multilateral trade deficit will simply migrate somewhere else – most likely to a higher-cost producer. That would be the functional equivalent of a tax hike on beleaguered American families – hardly the solution that US politicians are promising.
This is not to ignore important US-China trade issues that need to be addressed. Market access should be high on the agenda – especially for a sluggish US economy that needs new sources of growth, like exports. With China now America’s third largest – and by far its most rapidly growing – export market, the US should push hard to expand business opportunities in China, especially as the Chinese economy tilts increasingly toward internal demand. China should be viewed as an opportunity, not a threat.
At the same time, the US government should come clean with the American public about charges of Chinese currency manipulation and unfair trade practices. The renminbi has, in fact, appreciated by 30% relative to the US dollar since mid-2005. In broad multilateral terms – a far more meaningful gauge because it measures a currency’s value against a broad cross-section of a country’s trading partners – the “real effective” renminbi currently stands about 8% above its most recent 12-year average (1998-2010).
Yes, China continues to accumulate a vast fund of foreign-exchange reserves. But this is as much the result of speculators’ “hot money” plays as it is a conscious and perfectly reasonable effort by Chinese policymakers to remain focused on financial stability and manage currency appreciation in a gradual, disciplined, and orderly fashion.
China-bashing in the US speaks to a corrosive shift in the American psyche. It deflects attention away from those truly responsible for perpetuating the greatest saving shortfall in history. Washington has been seduced by the political economy of false prosperity. That seduction has encouraged America to squander its savings and live beyond its means for nearly two decades. Now the game is up.
The ultimate test of any nation’s character is to look inside itself at moments of great challenge. Swept up in the blame game, the US is doing the opposite. And that could well be the greatest tragedy of all. After all, America’s 88 deficits did not arise of thin air.
Stephen S. Roach, a member of the faculty at Yale University, is Non-Executive Chairman of Morgan Stanley Asia and the author of The Next Asia.
Copyright: Project Syndicate, 2011.
www.project-syndicate.org
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andrew15251 05:13 28 Oct 11
We borrowed money to stimulate the economy. Had we not done that the deficit would be be much much worse. Businesses and individuals are saving money as best they can. Businesses are sitting on top of close to 2 trillion in wealth, and individuals are busy paying down debt. This creates a lot of drag in the economy and the only solution is for the government to spend money to revive our economic prospects.
I am rather surprised that you can even take this seriously. Would you have preferred no rescue of the financial system and no stimulus? You may have at the time, but from your ivory tower, you would be reflecting now on what a mistake that was, with unemployment at 15% rather than 9%.
acerimusdux 06:17 29 Oct 11
You're partially right. But blaming government deficits and personal saving is just silly. Government deficits can only exist if there is a private surplus, and those deficits are mostly still being financed domestically. And personal savings was only low due to inflating asset prices, due to the stock market and real estate bubbles. The personal savings rate has averaged over 5% since the onset of recession in 2007.
So why ignore the underlying problem? U.S. monetary policy has clearly been too tight for some time. Too tight monetary policy leads to an inflated currency, asset bubbles, and trade deficits. The U.S. economy has long required an inflation rate in the 3%-5% range in order to maintain a reasonable balance between job creation and wealth preservation. When government policy (both monetary and fiscal) has put so much emphasis on wealth preservation at the expense of job creation, we can hardly blame foreigners for feeling their funds are safe holding U.S. assets.
You are simply mistaken if you think any more savings is currently needed to finance investment or economic growth. Look around you. Banks have more deposits then they know what to do with. They are talking about charging customers to take deposits, or turning them away. Corporations have record levels of cash. The banking system has over a trillion in excess reserves.
If you really want to increase jobs creating investment, i.e non-residential fixed investment, relative to consumtion, the way to do that is higher inflation expectations and higher interest rates. This is a pretty tight correlation, historically:
http://research.stlouisfed.org/fred2/graph/?g=34k
You fail to understand macroeconomic dynamics. Attempting to increase savings in these conditions would only lower the rate of investment, due to dynamic feedback effects. Due to the bloated currency, the U.S economy currently requires very high government deficits in order to maintain any reasonable level of employment. What we really need is to increase government spending; this is the only way now to increase investment and induce some needed inflation, while helping to restore international competitiveness.
jpf44736 06:44 29 Oct 11
While I agree with you that we should save more, unfortunately, lack of saving reflects lack of income. The median household income is about $50K which doesn't leave much room for saving. Also, it may be too late. Any saving will probably diminish money spent in our own country for restaurants, fancier foods, and vacations and other service sector extras. We've become almost completely dependent on foreign suppliers for all our commonly purchased manufactured items. Last year saw over a billion cell phones sold in the world, not a single one manufactured in the U.S.
RinconCruz 06:05 31 Oct 11
With all due respect to you Prof. Roach, from my understanding current policymakers understand Chinese policy as driving current global imbalances, one symptom of which is the US trade deficit.
Evidence that this might be case is that whilst the US runs deficits with 87 other countries, those countries do not have significant net surpluses. The only country with a large and growing surplus is the PRC, and the only nation that has so far supported a very large deficit is the US.
The very visible mercantilist bent of Chinese economic policy further underscores that the PRC seeks to benefit through these policies, and the country that has thus borne those costs is the US.
Also, saying that a currency has appreciated is not the same as saying that it currently has the "correct" exchange rate, since the rate the market would set to balance trade flows changes through time. That the yuan has appreciated doesn't preclude it from being undervalued.
Respectfully,
Manuel
drcarroll 01:18 31 Oct 11
Roach works for a bailed out bank.
farfetchedacds 03:14 01 Nov 11
Save more? Yes! BUT WHY?
Who in their right mind would save a depreciated currency? A currency that is a poor store of value? Now, if we wanted people to save, really save, we would insist that we either eliminate the fed or destroy it's ability to set yields that should rightfully be set by the owners of capital.
With the system we have now it is necessary to either spend it before it shrinks, invest in hard goods that hold value (are in limited supply and rare) or invest it to hedge the loss in value.
To induce savings requires a sound currency and yields set by a free market.
andrew15251 05:13 28 Oct 11
We borrowed money to stimulate the economy. Had we not done that the deficit would be be much much worse. Businesses and individuals are saving money as best they can. Businesses are sitting on top of close to 2 trillion in wealth, and individuals are busy paying down debt. This creates a lot of drag in the economy and the only solution is for the government to spend money to revive our economic prospects.
I am rather surprised that you can even take this seriously. Would you have preferred no rescue of the financial system and no stimulus? You may have at the time, but from your ivory tower, you would be reflecting now on what a mistake that was, with unemployment at 15% rather than 9%.