US claims on trade deficit challenged

Expert warns hefty levies cannot address broader economic issues

US fiscal policy and consumption patterns, as well as other domestic factors, are the main drivers of the US' persistent trade deficit, not foreign trade practices or trade liberalization, an economist has found.

"It makes little sense … to blame the trade deficit for the decline in manufacturing employment," said Maurice Obstfeld, a senior fellow at the Peterson Institute for International Economics, or PIIE, during a Brookings Papers on Economic Activity conference on March 27.

His paper, "The US Trade Deficit: Myths and Realities", directly challenges beliefs often cited in political discourse as the government intensifies trade measures, drawing concern from trade partners.

The trade deficit remains a longstanding aspect of the US economy, persisting in nearly every quarter since 1976 and averaging 3.1 percent of GDP annually since 2008, according to Obstfeld's research. The imbalance has increasingly become a political focal point.

Recent US actions have heightened global economic uncertainty, including a new round of tariffs targeting major US trading partners China, the European Union, Canada and Mexico.

US President Donald Trump was expected to announce a major trade policy change on Wednesday, when he plans to introduce "reciprocal tariffs" based on each country's trade practices, with a 20 percent tariff on most imports and a 25 percent tax on foreign-made vehicles.

In addition, a proposal from the US Trade Representative's Office to impose extra port fees on Chinese ships faces strong opposition, with critics arguing it could disrupt supply chains and increase costs for US consumers. China warns such unilateral measures represent a trend toward protectionism that undermines global trade norms.

Obstfeld said the primary cause of the US deficit was not trade policy. He explained that manufacturing's share of employment naturally decreases as economies become wealthier, irrespective of their trade balance.

"US trade deficits are high and likely to rise, notwithstanding new and prospective tariffs," Obstfeld wrote, pointing to domestic macroeconomic fundamentals and suggesting that recent US tariff policies are unlikely to significantly close the trade gap because they don't address the root causes related to national saving and investment.

Obstfeld also rejected the notion that the dollar's role as the world's premier reserve currency forces the US into running deficits. He said that the global economy could acquire dollars through various financial transactions, not solely through trade imbalances.

Figures show that gross international financial flows vastly exceed the size of the US current account deficit, indicating ample mechanisms for dollar acquisition outside of trade surpluses with the US, according to the economist.

Regarding the role of foreign capital inflows, often attributed to a "global saving glut" where countries save excessively, Obstfeld said that the US is not merely a passive recipient. "The trade deficit reflects an interplay of foreign and US macroeconomic factors," he said.

Fiscal policy

Obstfeld said that US fiscal policy plays a dominant role in shaping national saving and, consequently, the trade balance.

China was a significant topic of the discussion. He said it is not correct to attribute the entire US deficit issue to China.

"China is a big deal, but China is far from everything," Obstfeld said, calling for a broader view.

He mentioned the "China shock "experienced in the 2000s, acknowledging the impact of rapid import growth from China on some US manufacturing communities. Yet, he said that shock was significantly amplified by concurrent US domestic factors, noting "US macro conditions play a leading role".

At the panel, providing commentary on Obstfeld's paper were Brent Neiman, an economics professor at the University of Chicago Booth School of Business, and Fabrizio Perri, an assistant director and monetary adviser at the Federal Reserve Bank of Minneapolis.

Perri said the tariffs' potentially "positive but small impact" on the trade deficit comes at the cost of lower overall economic welfare and productivity.

"Tariffs make foreign goods more expensive," Perri said, emphasizing that their ultimate effect on the overall trade balance, which depends on how they influence total national consumption and investment, remains theoretically ambiguous and depends heavily on other economic adjustments.

yifanxu@chinadailyusa.com