Will Economic Illiteracy Trigger a Trade War?
US President Donald Trump and his commerce secretary, Wilbur Ross, repeatedly commit an economic fallacy that first-year economics students learn to avoid. And their embrace of economic ignorance could lead to disaster.
NEW YORK – Nearly 100 days after US President Donald Trump took office, he and his commerce secretary, Wilbur Ross, continue to commit an economic fallacy that first-year economics students learn to avoid. They claim that America’s current-account deficit (or trade deficit), which is in fact the result of America’s low and falling saving rate, is an indicator of unfair trade practices by Germany and China, two current-account surplus countries. Their embrace of economic ignorance could lead to disaster.
The current-account balance, measuring the balance of trade in goods, services, net factor income, and transfer payments from abroad, is equal to national saving minus domestic investment. That’s not a theory. It’s an identity, save for any statistical discrepancy between gross national product (GDP) and gross national income (GNI). It’s true whether you are liberal or conservative, populist or mainstream, a Keynesian or a supply-sider. Even Trump and all his deal making can’t change that. Yet he is threatening a trade war because of deficits that reflect America’s own saving-investment imbalance.
A country runs a current-account deficit if investment exceeds national saving, and runs a surplus when investment is less than national saving. For a country with a balanced current account, a deficit can arise if its investment rate rises, its saving rate falls, or some combination of the two occurs.