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Why does the US have a trade deficit? — Transcript

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0:00[Music]
0:04I'm Jan Eberly, the James R. and Helen
0:06D. Russell Professor of Finance at
0:08Northwestern University.
0:11And I'm John Steinson, Chancellor's
0:13Professor of Economics at the University
0:15of California, Berkeley. and we're the
0:17co-editors of the Brookings Papers on
0:19Economic Activity, a semianual academic
0:23conference and journal that pairs
0:25rigorous research with real-time policy
0:27analysis to address the most urgent
0:30economic challenges of the day. And this
0:32is the Brookings podcast on economic
0:35activity, where we share conversations
0:37with leading experts on the research
0:39they do and how it will affect economic
0:42policy.
0:43Thanks for downloading the first episode
0:45of season 6 of the BPIA podcast. This
0:49season, we'll be listening to
0:51discussions about papers from the spring
0:532025 BPIA conference hosted by Brookings
0:57on March 27th and 28th. A number of the
1:01topics to be discussed this season are
1:03particularly timely. These include
1:05China's economic growth, the US trade
1:08deficit, and housing affordability.
1:12Plus, we have new papers on the recovery
1:14from the CO 19 recession, labor
1:17migration, and the role of the Federal
1:19Reserve in preventing Treasury market
1:22dysfunction. As always, we're covering a
1:24wide range of topics. We're kicking this
1:27season off with two veterans of the BPIA
1:30podcast. Brooking senior fellow Jan
1:33Maria Malaise Ferretti and Mory Obsfeld
1:36of the Peterson Institute for
1:37International Economics who both joined
1:40our show back in season 1 to discuss
1:43Obseld's work on the global dollar
1:45cycle. Today they'll be discussing new
1:48paper, the US trade deficit myths and
1:52realities.
1:53Jan, this paper seems to be questioning
1:56the conventional wisdom about the
1:57underlying forces giving rise to the US
2:00trade deficit over the past few decades.
2:03That's right. Much of the discussion in
2:04the media focuses on the conditions of
2:07trade, say competition from other
2:09countries or an abundance of global
2:11savings eager to purchase US assets. But
2:15this paper brings the story home to the
2:17US. my argues that US borrows so much
2:21from the rest of the world to finance
2:23our budget deficit that it's inevitable
2:26that we run a trade deficit. These two
2:28deficits both reflect the fact that we
2:31consume more now than our current income
2:34can support. This perspective has
2:36important policy implications since in
2:39order to restore balance, it says that
2:42the US needs to address internal issues
2:45like bringing revenue and spending into
2:47balance rather than pushing other
2:49countries to reduce their trade with the
2:51US, say by tariffs or other trade
2:54restrictions. Right? It seems my is to
2:58some extent arguing for a quote unquote
3:00twin deficits explanation. a budget
3:02deficit and a trade deficit that go
3:04together, similar to what was widely
3:06discussed in the 1980s during the Reagan
3:10administration. I'm really looking
3:11forward to listening to the
3:13conversation. Let's turn it over to Dian
3:15Maria.
3:17Thank you, John and John, and welcome my
3:21nice to have you back on Brookings
3:24podcast. Great to be here, John Maria.
3:27So I think this paper is as topical as
3:32it can be. On the day we are recording
3:36this podcast, April 2, we are expecting
3:39an announcement of new tariffs imposed
3:41by the United States on its trading
3:44partners.
3:46It is clear from the rhetoric that
3:49accompanies these measures that the US
3:53trade deficit and the US data positions
3:57in the view of the administration
4:00primarily reflect actions that are taken
4:04by partner countries which are in some
4:07way taking advantage of the United
4:10States. And we have seen just in the
4:14past week new data releases from the US
4:18Bureau of Economic Analysis which shows
4:21that the US had a current account
4:25deficit visav the rest of the world of
4:29close to 4% of US GDP. So we're talking
4:34of something in the range of $1 trillion
4:37plus and a net data position which has
4:43now reached about 90% of US
4:47GDP. So Mory, I wanted to start maybe by
4:51asking you what you think the
4:54administration actions taken so far as
4:57well as the actions we expect to be
5:00taken today could entail for the US
5:05economy and how they would deal with the
5:09numbers that I have just highlighted.
5:12Well, two months into the Trump
5:15administration, we've seen a number of
5:18tariff announcements, some of which have
5:21been quickly withdrawn than reinstated.
5:24It's almost too dizzying to go through
5:26all of them, but the ones that seem to
5:28have stuck are uh steel aluminum
5:31tariffs, higher tariffs on China,
5:33tariffs on autos, and today, which the
5:37administration calls liberation day,
5:40will presumably involve a much more
5:44far-reaching announcement. But again,
5:46with this administration, one never
5:48knows what to expect. And one factor of
5:53the recent experience has been the
5:56enormous uncertainty over tariff and
5:59trade policy that has been unleashed
6:02really since the November election. The
6:05news-based measures of trade policy
6:08uncertainty that are tracked by several
6:10researchers have spiked up to impress
6:13unprecedented levels. And research
6:15indicates that such uncertainty has a
6:17dampening effect on economic activity
6:21particularly on investment. So we'll see
6:23what happens. So Mori, thank you very
6:27much for this. Can you guide us through
6:31your thinking on the diagnosis of the
6:35problem that we have that is
6:38underpinning really the administration's
6:40actions? I know you've discussed these
6:42issues in the paper. It would be great
6:44to illuminate our listeners on this
6:48specific issue. There are two
6:51fundamental variables that the
6:52administration focuses on and
6:55particularly the president and his
6:57discourse. One is the trade deficit
7:01which probably features more prominently
7:04the president views a trade deficit as
7:07evidence that the United States is
7:09losing from trade when it imports more
7:12than it exports. The other related issue
7:17is the level of manufacturing
7:19employment. Of course, manufacturing
7:21employment in the US has dropped
7:23precipitously since its heyday in the
7:27early post-war period. Certainly,
7:30manufacturing employment as a percent of
7:32GDP has dropped more slowly since the
7:34global financial crisis, but it
7:37continues to decline. This fall is
7:40reflected in the hollowing out of
7:42industry in the rust belt states and
7:45elsewhere in the US. These are states
7:49that are electorally very important and
7:53President Trump and his allies maintain
7:56that the primary cause of this hollowing
7:58out is international trade which has led
8:03to the loss in US
8:04jobs and also a loss in US assets. you
8:08cited the recent figures on US net
8:12international investment position
8:14negative 90% of GDP and that in part
8:19reflects losses incurred through ongoing
8:23trade deficits with the rest of the
8:25world. The administration believes that
8:28the tariffs that are going to be rolled
8:31out and that have been rolled out can
8:33correct both of these problems. both
8:36return the US trade balance to balance
8:39and reverse the decline in manufacturing
8:43employment and bring a big increase in
8:46factories and manufacturing jobs
8:50and is your sense that the diagnosis of
8:54the problem is correct. So, do you see
8:58the US trade deficit as something that
9:02is really a reflection of foreigners in
9:05some way taking advantage of the US and
9:08hollowing out its manufacturing
9:10structure?
9:12I think the fundamental answer is no.
9:15that the decline in manufacturing bears
9:19some relation to trade issues to the
9:23evolving nature of the global economy
9:25and the broader scheme of things. Around
9:28the the year 1990 we had China entering
9:31the world economy in a big way, India
9:33reforming the collapse of the Soviet
9:36block and those countries entering the
9:38world economy. So we certainly had a
9:41rise in the global supply of labor which
9:44I think has played some role in making
9:48lower price goods available to the US
9:51and depressing global wages. So this is
9:54certainly something that is real. But
9:56the fundamental driver of declining
9:59manufacturing employment which we see
10:03around the world in surplus countries
10:05and in deficit countries has been rising
10:07productivity in manufacturing which
10:10accompanies rising incomes and rising
10:13demands for the goods that are produced
10:15in the service sector.
10:17So to some level declining manufacturing
10:20employment is an inevitable consequence
10:23of the structural transformation brought
10:25by higher productivity growth in
10:28tradable goods. The idea that the trade
10:31deficit is a function of foreign
10:35victimization of the US I think is way
10:38off the mark. There are a number of
10:40theories of why this might be true.
10:43One is that US trade liberalization and
10:47foreign trade practices have led to a US
10:51deficit. Another is that a global
10:55glutton saving driven in part by foreign
10:58countries suppression of consumption
11:01among their populations has created
11:04capital flows into the US that require
11:07as a counterpart more US consumption and
11:10more US imports.
11:12And a final theory is that the specific
11:15role of the dollar as an
11:17international currency and notably as an
11:21international reserve currency requires
11:23the US to run current account deficits
11:26to supply the world with dollars. And I
11:29would argue that all three of these
11:31views are at best partial and at worst
11:35completely
11:37incorrect. The fundamentally the US
11:39trade deficit is a macroeconomic
11:41phenomenon. It reflects the fact that
11:43the US spends more than it produces. It
11:47is true that the rest of the world
11:49therefore spends less than it produces.
11:53But that doesn't establish that the rest
11:55of the world's actions are in some way
11:57forcing the US to spend more than it
12:01produces. And that's the uh sense in
12:04which the critics of trade complain that
12:06the US is a victim. The US is being
12:08forced to spend more than it produces.
12:11And I think that conclusion is very hard
12:14to support. Thank you very much my and
12:18yes I think some of the problems the
12:22large figure on the US position that
12:25negative net international investment
12:27position which means basically the net
12:30claims that other countries have on the
12:33United States. The size of that position
12:36is very large. But it does depend also
12:40on the value that assets located in the
12:44United States have. We all know how the
12:48value of US stocks has skyrocketed in
12:52the past decade and a half and that
12:55contributes to US wealth. But since some
13:00of these stocks are owned by foreign
13:03investors, it does increase net US
13:06liabilities visav the rest of the world.
13:09So what do you think would be needed to
13:12address problems related to US external
13:16accounts? So is the trade deficit? Is
13:19the current account deficit a problem?
13:20Is the big data position a problem? How
13:23can the United States implement policies
13:26that would help mitigate those problems?
13:31Well, as you pointed out, has to
13:34interpret the US ded position with
13:36caution because it's only one component
13:38of US wealth. And to take an example, as
13:42you pointed out, last year the US
13:44current account deficit was
13:463.9% GDP. So if that were the only
13:49driver of the US international position,
13:52the US international position would have
13:54deteriorated by 3.9 percentage points of
13:57GDP. In fact, it deteriorated by almost
14:0020 percentage points of GDP. And the
14:04primary reason was that the US stock
14:08market did so well relative to foreign
14:10stock markets which increases US wealth.
14:12So in the broad picture of US wealth, US
14:16wealth owners did well. Another factor
14:18was the dollar's appreciation which
14:20improves the US terms of trade and also
14:23benefits American consumers. So we have
14:26to be careful in looking at the net
14:29international investment position and
14:32concluding that the US is so incredibly
14:35indebted that it can never dig its way
14:38out of that hold. That is only one
14:40portion of US wealth which includes the
14:43US's very productive capital stock some
14:46of which is publicly traded and is a
14:48more important component of US wealth.
14:51Now I worry more about another deficit
14:54which is the US federal
14:57deficit and that's intimately linked to
15:00the current account deficit because it's
15:02a big part of the reason not the only
15:04part but a big part of the reason why
15:06the US saves so little and therefore
15:09borrows abroad. Last year the US federal
15:13deficit was 6.5% of GDP. If US saving
15:17cannot fully provide those funds to the
15:21US government, it has to borrow abroad.
15:23And that's where the connection comes in
15:25with the deficit. There are legitimate
15:28worries particularly with Congress
15:30preparing to take actions which will
15:33increase the deficit that international
15:37lenders may be reaching a point where it
15:41may be harder to borrow abroad in terms
15:44of the world demanding higher interest
15:46rates. That's a big problem for the
15:48fiscal position of the US. The US
15:52government could address that problem
15:54while also improving its trade balance,
15:58giving some more support to
16:00manufacturing by taking actions that
16:03bring down the government deficit. Those
16:06would involve, if they were to be
16:08durable, significant rethinking about
16:11entitlement programs and how to fund
16:14those longer term, not just chainsaw
16:17cuts to government spending that don't
16:20amount to much. And also serious
16:23thinking about revenue sources, not just
16:26the administration's current idea of
16:28going back to the uh tariff-based
16:31revenue system of the McKinley era.
16:35Thanks my and indeed what you say about
16:38the fiscal deficit ties in with the
16:41evolution of the external the net
16:43international investment position as
16:45well. We mentioned the good side of
16:48increasing equity prices if you want the
16:50good reasons for the increase in US
16:52liabilities but you also have close to
16:5550% of US GDP worth in net debt in debt
17:01instruments as opposed to equity where
17:04the argument that high valuations
17:07reflect the strength of the US economy
17:09is of course more questionable than is
17:12the case for equity. So I wanted to turn
17:18to lessons from history. Really these
17:22are not new debates. The size of the US
17:26current account deficit, the dynamics of
17:29US external
17:30liabilities. A lot of these themes were
17:33at the center of policy discussions even
17:36before the global financial crisis. And
17:39your paper does a masterful job of
17:42discussing those issues and putting
17:46history at work to evaluate the various
17:50theories that have been put out to
17:53explain what has happened. So can you
17:56guide us a bit through that? So how did
17:59we get where we are in terms of US
18:03deficit and external positions and what
18:06is your view on the extent to which
18:09these developments are driven by a US
18:12specific factors versus the behavior or
18:17if you want the underlying macro
18:20evolution in trading partners.
18:22Well, the really long history, at least
18:25the long post-war history, is that the
18:29US entered the post-war era with trade
18:32surplus, and that has declined over
18:35time. The US trade balance has been
18:38negative
18:40since sometime in the 1970s. In fact,
18:43the weakness of the trade balance was
18:45one of the factors in President Nixon
18:48leaving the uh Brettonwoods gold
18:50arrangements and trying to devalue the
18:52dollar in
18:551971. Where you really see a sharp
18:57change I think or a sharp move toward
18:59deficit toward the protracted deficits
19:02that we've had the uninterrupted
19:05deficits is in the Reagan era. If you
19:08look from say 1960 to 1980, the US rate
19:12of personal saving was about
19:1410%. Around 1980, it's been closer to
19:175%. So that's a big structural change in
19:20the behavior of households. Now, of
19:22course, there's also corporate saving
19:23and government saving. But in the 80s,
19:26you also had a shift to very large
19:29government deficits under the Reagan
19:31administration, a much larger current
19:34account deficit.
19:36And at some level, we've not been able
19:39to really get away from that. It's true
19:41that President Clinton's administration
19:44was able to bring the budget briefly
19:46back to surplus, but that was quickly
19:50undone by the Bush tax cuts. And
19:52moreover, other factors under the second
19:55Bush administration led to unprecedented
19:58current account deficits. And I focus on
20:02that period in my paper because I think
20:04it's so important for understanding the
20:07current policy and political environment
20:10that we're in. In the decade of the
20:132000s, the current account deficit
20:15approached 6% of GDP. It's a figure
20:19that's hasn't been matched, was never
20:21matched before, has not been matched
20:23since. And that naturally gave rise to a
20:26lot of consternation, a lot of debate.
20:30It was also the decade of the China
20:31shock, the decade in which a number of
20:34heartland US communities were absolutely
20:37devastated by Chinese import
20:39competition. And it was also the decade
20:42that saw a big housing boom in the US
20:45bubble. Most would say that led to the
20:47global financial crisis.
20:50And we've been living since then with
20:53economic narratives and political
20:56repercussions that really come out of
20:58the China shock period and the um global
21:02financial crisis. In that decade also
21:05the decline in
21:07manufacturing above and beyond the China
21:09shock was absolutely
21:11precipitous absolutely precipitous. Now
21:14of course that's also the period when
21:16the internet became a thing. we had
21:19productivity gains coming from that
21:21technological
21:22development. In the paper that you
21:25mentioned, I try to talk about this
21:27period and what were really the uh
21:30factors driving the huge US current
21:33account deficit. A prominent narrative
21:36at the time was the global saving blood
21:39theory. In a nutshell, that theory held
21:42that after the Asian crisis of 1997
21:461998, those countries wanted to
21:50self-insure by accumulating dollar
21:52foreign exchange reserves. This together
21:55with energy surpluses by the big oil
21:59exporters led to a glut of global saving
22:02which entered the US in the form of
22:04capital inflows, pushing down interest
22:07rates, appreciating the dollar and in
22:11part igniting the housing boom and
22:14taking us up to the events of 2008 and
22:18the financial
22:19crisis. And I try to push back on that
22:22by introducing a more complex narrative
22:25in which at least in the years from 2002
22:29to
22:312008, capital is being pulled in by US
22:35domestic factors rather than pushed in
22:38by foreign saving. Those domestic
22:41factors are primarily financial
22:45innovation in the housing sector that
22:48allows for much more debt issuance
22:51particularly mortgage debt issuance
22:54which drives up housing prices
22:56increasing homeowners equity leading to
23:00more debt issuance to extract that
23:03equity and driving the current account
23:07deficit. Now, of course, there are still
23:10factors pushing capital into the US.
23:13There's this big accretion of foreign
23:16exchange reserves which helps keep US
23:18interest rates lower. But for me, one of
23:21the telling factors or telling bits of
23:24evidence over this period from 2002 to
23:27the crisis is that you would think that
23:30if capital was pushing into the US, the
23:33dollar would be appreciating. But
23:35actually it is depreciating very
23:37strongly all over this period. And that
23:41to me says that really what is driving
23:44the dollar is all of this debt issuance
23:47by US households connected with the
23:50housing crisis. So that's a somewhat
23:54more complex narrative, but it's also
23:55one that puts in context this narrative
23:58that the US is the helpless victim of
24:02foreign forces. I mean, of course, there
24:04are policies that could have been
24:06followed then to tighten up the mortgage
24:09market.
24:10reduce subprime mortgage borrowing. Not
24:13only would these have limited the
24:16deficit, limited the harm to
24:18manufacturing, but they also might have
24:21reduced the severity of the housing
24:23crisis that we ultimately suffered.
24:27Thank you, Bori. And I think we look at
24:30the implications of these of theories
24:33formulated back then for what is
24:35happening more recently. We have to see
24:40how many things have shifted between the
24:43decades. As you were pointing out, there
24:46was substantial accumulation of foreign
24:49reserves in the period leading up to the
24:51global financial crisis and even in the
24:53years immediately after that. Right.
24:57Absolutely. But that has waned. And if
25:01one looks at the statistics on the size
25:05of global foreign exchange reserves in
25:07relation to the size of the global
25:09economy, we see a pretty substantial
25:12drop since those years. I mean the
25:15maximum was reached around 2012 2013.
25:18Since then it's been declining. So it is
25:21very hard to make the argument that this
25:26continued desire to accumulate more
25:28reserves that somehow can explain the
25:32overall dynamics of inflows into the
25:35United States. I wanted to ask you how
25:39you see the role of China. You've
25:42touched upon it already in your remarks
25:46when talking about the hollowing out of
25:48manufacturing, but there is this view
25:50out there that China is the largest
25:53creditor of the United States, which is
25:56absolutely incorrect. But how do you see
25:59the role of China in explaining the
26:02dynamics of the US current account and
26:06US liabilities?
26:08Well, China really begins to become a
26:10major factor in the mid 2000s. Now,
26:14notwithstanding the China shock, which I
26:16think affected certain communities
26:18particularly strongly, but if you just
26:21look at the data on global imbalances,
26:24um China's imbalance compared to that of
26:27the US, China's surplus compared to the
26:29US deficit in the 2000s starts out
26:32pretty small and then it becomes more
26:34important. But over that entire period,
26:37if we look at the deficit visav China as
26:41compared to the US overall trade deficit
26:44with all trade partners, it's not nearly
26:47the majority of that. It certainly
26:49becomes more important. And as you said,
26:52Chinese reserve accumulation really
26:55becomes important after the global
26:57financial crisis. It really spikes up.
26:59And then of course, China has its own
27:02crisis in the mid2010s where it it
27:06spends a quarter of its reserves
27:08defending the currency. And by the way,
27:11if that were the main driver of the US
27:14current account, we should have seen a
27:16trillion dollar improvement in the US
27:18current account balance. We did not. So
27:21just putting that factoid out there. Now
27:25I think even today the importance of
27:27China is exaggerated. Now, let me be
27:29clear. There's no doubt that the fact
27:31that China suppresses consumption and
27:34runs a surplus contributes to the
27:37overall US deficit. In terms of a global
27:40equilibrium, that would have to be the
27:42case. And there's no doubt that China
27:45pursues strategies of overcapacity and
27:49export promotion that can be injurious
27:53to competing industries elsewhere. Those
27:56things are definitely true, but to blame
27:59the overall US deficit on China and
28:03those practices is just quantitatively
28:06way off the mark. For one thing, trade
28:08practices are second order determinants
28:12of the overall current account. And
28:14secondly, China's surplus is only about
28:17a third the size, at least in 2023, of
28:21the US current account deficit for that
28:24year. Now, the 2024 numbers, we'll know
28:27better in a couple of weeks when the IMF
28:29releases its world economic outlook, but
28:33most of the global surplus that is the
28:37counterpart of the US deficit actually
28:40comes from advanced economies at the
28:42moment. Absolutely. And indeed, those
28:46are the largest creditors of the United
28:49States. And although China runs a still
28:52large bilateral trade surplus visa v the
28:55US, its investment pattern has changed
28:59dramatically since those years when
29:02fundamentally the Chinese surpluses were
29:05mirrored by an accumulation of reserves.
29:08China is investing in other emerging
29:10economies, belt and road initiatives and
29:13other uses its dollars in a different
29:17way and its claims on the US have
29:19remained actually quite stable in dollar
29:22terms and so declining as in relative
29:26terms it's a big change and so
29:29associating bilateral balances with
29:32bilateral creditor positions is just off
29:35the mark when
29:38Thank you very much. This was a
29:40fascinating tour through issues that are
29:43really central to the attention of
29:45global policy makers at the moment. And
29:48um I strongly encourage everybody to
29:51read the paper. It is a fascinating read
29:54including because of the depth of the
29:56historical analysis that underpins it.
29:59Thank you very much. Thank you John
30:01Maria. It's a pleasure as always.
30:05[Music]
30:06Once again, I'm John Steinson and I'm
30:09Jan Everly and this has been the
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This page contains the full transcript of Why does the US have a trade deficit? by Brookings Institution, generated from the public captions YouTube serves with the video. The transcript has 4,072 words across 649 segments, with the original timestamps preserved so you can click any line to jump to that moment in the embedded player.

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