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The Right Way to Rebalance Trade

The Trump administration’s introduction of sweeping protectionist measures was one of the defining economic-policy developments of 2018. By embracing a bilateral perspective on national current accounts, the US government has made it clear that it will risk the long-term costs of tariffs for the sake of short-term political goals.

BEIJING – The US-China trade dispute reshaped the world’s economic and financial landscape in 2018, and it might continue to do so for years to come. That’s not how it looked as recently as May, when a bilateral trade deal was almost within reach. But the United States backed out at the eleventh hour, and tensions have since flared, with President Donald Trump’s administration imposing tariffs on a wide range of Chinese exports, and China responding in kind.

With an unprecedented $600 billion worth of goods potentially affected, it is worth considering how useful tariffs really are for correcting current-account imbalances, which is Trump’s stated goal. Most economists view trade from a multilateral perspective, focusing on an economy’s overall balance with the rest of the world. And the US has been running overall trade deficits since 1976.

The US deficit peaked at 5.5% of GDP in 2006, but usually amounts to around 3% of GDP. At $552 billion in 2017, it is the world’s largest deficit in absolute terms. Deficits rise when a country spends more than it produces, which means that they are rooted not so much in trade as in domestic savings and investment behavior. In the US, investment accounts for 21% of GDP, in keeping with the average across advanced economies (22%), whereas savings account for less than 19%, which is far below that of America’s peers.

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