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Inconvenient Truths About the US Trade Deficit

CAMBRIDGE – The United States has a trade deficit of about $450 billion, or 2.5% of GDP. That means that Americans import $450 billion of goods and services more than they export to the rest of the world. What explains the enormous US deficit year after year, and what would happen to Americans’ standard of living if it were to decline?

It is easy to blame the large trade deficit on foreign governments that block the sale of US products in their markets, which hurts American businesses and lowers their employees’ standard of living. It’s also easy to blame foreign governments that subsidize their exports to the US, which hurts the businesses and employees that lose sales to foreign suppliers (though US households as a whole benefit when foreign governments subsidize what American consumers buy).

But foreign import barriers and exports subsidies are not the reason for the US trade deficit. The real reason is that Americans are spending more than they produce. The overall trade deficit is the result of the saving and investment decisions of US households and businesses. The policies of foreign governments affect only how that deficit is divided among America’s trading partners.

The reason why Americans’ saving and investment decisions drive the overall trade deficit is straightforward: If a country saves more of total output than it invests in business equipment and structures, it has extra output to sell to the rest of the world. In other words, saving minus investment equals exports minus imports – a fundamental accounting identity that is true for every country in every year.