The truth behind the US’s huge trade deficit

Economics professor Zhang Rui notes that the US’s huge trade deficit cannot be looked upon in isolation from the dominance of the US dollar; when exporting countries hold more US dollars, they are more able to purchase US debt and support the US in issuing national debt and get US dollars to flow back to the US. This suggests that looking beyond the surface of its large trade deficit, the US's fundamentals remain strong and with the advantages it has in the capital account and services trade, there is little chance that its leading position in global trade can be usurped.
In an aerial view, shipping containers and a container ship are seen at the Port of Los Angeles on 20 September 2021 near Los Angeles, California. (Mario Tama/AFP)
In an aerial view, shipping containers and a container ship are seen at the Port of Los Angeles on 20 September 2021 near Los Angeles, California. (Mario Tama/AFP)

As far as collective memory goes, for as long as trade deficit records have existed, the US has been in the red.

According to the latest figures from the US Department of Commerce, the US trade deficit in August hit a record US$73.3 billion. If this stubborn imbalance of forces continues, the US trade deficit will probably keep going up.

Currently, the structural imbalance in the recovery of major global economies from the pandemic is a direct catalyst exacerbating the US trade deficit. China’s quick, tight pandemic controls have allowed its industrial and supply chains to recover and return to normal from its previous slowdown, while the US and its trading partners continue to be troubled by the virus, as supply channels for US and overseas products have been squeezed and cut off. Amid such irrepressible demand, Chinese products are promptly shipped off to fill the gap, with a jump in exports to the US.

Trade surplus for China, trade deficit for the US

One example is that while the US trade deficit was at a record high in August, during the same period China’s trade surplus with the US also hit a two-year high. With its lack of supply capabilities leading to an overall shrinking of export volume, the US trade deficit seems especially striking.

But even as China’s export capabilities support global supply channels that have been suppressed by the pandemic and drive the increase in the US trade deficit, the global structural shortfall in upstream production — especially core production capabilities — is also a new pressure for the US trade deficit.

Take the automobile industry for example. The shortage of chips has led to lower production of cars globally and fewer imports and exports across the board. But for the US, its car exports have slowed much more than its imports, and this has contributed more significantly to its trade deficit.

car
Visitors check on a Ford Mustang Mach-E electric vehicle displayed at a launch event in Shanghai, China, 13 April 2021. (Yilei Sun/Reuters)

Of course, with the pandemic easing, and greater flexibility in its own supplies, coupled with a recovery in peripheral market demand, the pressure of the US trade deficit caused by a phased imbalance would be eased to some extent. However, as long as factors for systemic imbalance remain and continue to fester, the US’s trade deficit will not be easily removed.

...the US has enjoyed the convenience of imported products through the international division of labour. But the country’s imbalance in spending and saving pushed the already precarious trade deficit straight into the fast lane.

Industries moving overseas

The international division of labour of the 1980s, which exploded with the growth of information technology, brought about the spatial-geographical displacement of industrial resources, shifting the manufacturing sector from the most developed countries to developing countries.

This led to new divisions and realignment of production roles. For example, developed countries engaging in technological innovation and product design, and developing countries taking care of production and manufacturing, became the basic framework of a production chain.

As the most developed country of the time, the industry structure in the US was also transformed in this international division of labour. Not only did labour-intensive industries such as textiles, fashion and shoes shift to other countries, but some finance- and technology-heavy industries such as steel, automobiles and electronics did so as well, leading to contraction and disruptions in the US manufacturing industry. This industrial hollowing-out led to the US’s dependence on imports, and brought changes to the import/export model.

Yes, the US has enjoyed the convenience of imported products through the international division of labour. But the country’s imbalance in spending and saving pushed the already precarious trade deficit straight into the fast lane.

As a policy to stimulate spending, US tax laws have always encouraged low savings and borrowing to spend. Mortgage loan interests can be used to offset taxable income, and there is no value-added tax or national consumption tax.

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People shop in a clothing store on 19 July 2021 in Los Angeles, California. (Frederic J. Brown/AFP)

In addition, the US Federal Reserve has kept interest rates low, strengthening the people’s tendency to spend rather than save. While the pandemic has made many Americans more aware of risk prevention and they are starting to save money, right now the savings rate in the US is only about 10%, the lowest among the world’s top ten economies, while there has been no change in its rate of spending at 80%, the highest among Western countries.

It is hard to change this distribution of household and individual financial resources. And as long as spending exceeds savings, in the context of weak domestic supply, there would be a strong driver for imports. Hence, the trade deficit as a result of its low savings would stand out and become structural.

Strength of US dollar supports sustained but non-risky US trade deficit

Savings can be used for consumption or investment. The US’s savings rates are lower than investment rates, and more savings are spent rather than invested, and the US government has to boost investment as an economic driver. But when it comes to financing, domestic loans are unable to meet investment needs, and the government has to raise funds from foreign lenders as a result, which creates an ever-growing budget deficit.

Domestic investment - private domestic savings - government savings = trade deficit.

From the simple equation above, a budget deficit (negative government savings) would support a deficit in savings and the trade deficit. That is, a budget deficit bolsters a trade deficit, and a trade deficit would surely follow a budget deficit in the US. 

Indeed, few countries do not borrow from others; at the same time, few countries are free of US dollar debt. Also, no other country has the privilege like the US of issuing national debt so easily at zero cost. The trade deficit highlights the real inequality between the US dollar and other currencies, and the financial position of the US versus other countries.

...the dominance of the US dollar is the systemic basis of the US trade deficit.

wall street
People walk along Wall Street in the financial district of Manhattan on 29 September 2021 in New York City. (Spencer Platt/AFP)

Globally, the US dollar is not only the main tool for international trade settlements and exchange rate transactions, it is also the core currency for global investment and financing, as well as an important reserve asset for many countries. Besides, the US dollar is freely circulated worldwide. In comparison, no other currency is as universally recognised and accepted for transactions, or as trusted as a reserve. Many currencies are also backed by the US dollar.

And because it sees its currency as unrivalled, the US issues debt at will; and while the trade deficit has led to an outflow of US dollars, which technically signifies a loss of US wealth on paper, at the same time when exporting countries hold more US dollars they are more able to purchase US debt and support the US in issuing national debt and get US dollars to flow back to the US.

Meanwhile, the US only pays for printing US dollars, which hardly costs anything; in return, it gets cheap goods from exporting countries, along with lower domestic inflation and good benefits for its people. At the same time, the flowback of US dollars allows a sustained but non-risky US trade deficit. The interplay between the trade deficit and budget deficit has made the US the biggest winner in the competition for international trade and financial resources.

History shows that US leading position in global trade will be maintained

The fact is, the history of the US trade deficit is an extension of the history of the dominance of the US dollar; rather, the dominance of the US dollar is the systemic basis of the US trade deficit.

For a century before the collapse of the Bretton Woods system, the US had a history of a trade surplus. But since its first trade deficit of US$152 million in 1971, that figure has not gotten less — in 1980, it was US$79.3 billion; in 1990, US$123.6 billion; in 2000, US$4.78 trillion; and in 2020, US$6.79 trillion.

As a part of financial history, under the Bretton Woods system, the US dollar was tied to gold, which significantly restricted the US in issuing US dollars. But after the system broke down, the US dollar was delinked from gold, and the US could issue dollars and create credit according to the country's needs. Besides, the breakdown of the Bretton Woods system did not weaken the status of the US dollar as an international currency, instead, it was tied to oil as the “oil-dollar” and went on to influence the prices of big-ticket items.

...while a surplus in [the US's] services trade and the capital account is driving a balance in its international trade, it also shows its strength in exporting capital, as well as its competitiveness at the top of the global industrial chain.

shop
Shoppers carry bags while walking through the Village at Corte Madera on 16 September 2021 in Corte Madera, California. (Justin Sullivan/AFP)

In the end, the dominance of the US dollar allowed the US to have no qualms about borrowing, and effectively supported the US in salvaging its “loss” due to its trade deficit. The US trade deficit grew, and the dominance of the US dollar expanded at the same time.

Foreign trade consists of the current and capital accounts. The current account includes goods and services trade, and the US trade deficit is in the trade of goods. The US has maintained a trade surplus for its capital account and services trade.

For any country, international trade is not about seeking a surplus in all aspects, but a balance in trade. It is common to have a surplus in the current account and a deficit in the capital account, or a deficit in goods trade and a surplus in services trade, or vice versa.

Especially for the US, while a surplus in services trade and the capital account is driving a balance in its international trade, it also shows its strength in exporting capital, as well as its competitiveness at the top of the global industrial chain. So, even if its trade deficit will continue to grow, as long as it stands steady with the advantages it has vis-à-vis the capital account and services trade, there will be no change or reversal in the US's winning position in global trade.

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