the real cause of trade deficits

In an FT column, Megan Greene provides an excellent, concise explanation of why the US has a large trade deficit, and why tariffs on trade will not reduce it. President Trump should read this before his trade war harms the US and its trading partners. This is Economics 101, understood by nearly all trained economists but difficult for non-economists to understand.

The US has enjoyed high levels of domestic investment and has had a falling national savings rate for decades. There is no particular reason to believe that US tariffs on imported goods from other countries would have any significant direct effect on either of these things, while the retaliation will hurt US exports. So how does the US get rid of its pesky current account deficit if not with trade barriers? The only way is to address the US’s internal imbalances by lowering domestic investment or raising national savings.

Megan Greene, “Any method of reducing the US current account deficit is risky“, Financial Times, 5 April 2018 (gated paywall).

Ms Greene is a managing director and chief economist at Manulife Asset Management, London, United Kingdom.

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