Did household savings, deficit spending affect US trade deficit?

When it comes to solving America’s trade deficit, some economists say instead of scapegoating Beijing, the White House should look into some of its deep-seated domestic problems first, such as low household savings and deficit spending.

The White House has rejected the framing of the ongoing trade disputes between the US and China as a war.

Robert Lighthizer, US trade representative, Peter Navarro, President Trump’s key trade adviser and Wilbur Ross, US Secretary of Commerce have all come forward in the past couple of days and justified Washington’s trade actions against China.

1.Wilbur Ross, US Secretary of Commerce

US Secretary of Commerce Wilbur Ross.

“When we are 500 billion down, this isn’t a trade war we can lose. We’ve had this trade deficit issue for a long long time.”

2. Robert Lighthizer, US trade representative

US trade representative Robert Lighthizer.

“We had 375 billion deficit in goods trade with China. This is unsustainable. They are half of our problem.”

3. Peter Navarro, Director of White House National Trade Ccouncil

“When China joined the WTO, they promised to play by the rules. They didn’t. Their GDP grew from 1 trillion to 12 trillion. And in the meanwhile we lost 60 thousand factories and 5 million manufacturing jobs. That’s on China.”

Peter Navarro, director of the National Trade Council, center, in the White House

Washington, DC, US.

The White House seemed to acknowledge that intellectual property (IP) and alleged technology transfers are just easy targets while the Section 301 Investigation is a weapon in America’s trade toolbox. The ultimate goal is to resolve the deficit and more importantly perhaps, to prevent China from challenging America’s dominance in the global economy.

Some US experts say these are Washington’s tactics of scapegoating others for its own problem.

Stephen Roach is professor at Yale University and author of the book "Unbalanced: The Codependency of America and China." He argues that American household’s consume-now-pay-later culture and savings shortfall explain much of America’s deficit with China.

Unbalanced: The Codependency of America and China

Roach wrote: “American politicians love to blame China and trade deals as the major source of pressure on US jobs and wages. But when it comes to the trade deficits... the US made its own bed... The country has been living beyond its means for decades and drawing freely on surplus saving from abroad to fund the greatest consumption binge in history. Politicians, of course, don’t want to blame voters for their profligacy; it is much easier to point the finger at others.”

Some data seem to support Stephen Roach’s argument.

According to the World Bank and the US Federal Reserve, in 1970, US household consumption was 666.6 billion US dollars, in 2017 that figure is 13.7 trillion US dollars, or nearly 70 percent of GDP.

The US has 4 percent of the world’s population but consumes 22 percent of its goods.

As America is buying more, they are doing so with borrowed money. According to Federal Reserve and US Census Bureau, US family debt is 14 percent of disposable income in 1970. In 2017, US family debt is 73 percent of disposable income.

In the meantime, Americans borrow more and save less. The saving-to-GDP ratio dropped from 13 percent to just 2.6 percent.

And if one looks at the deficit chart, this is where problems begin.

1975 was the last time the US had a trade surplus. Since then, the US has barely experienced a surplus, and the deficit has increased year by year until it reached 568 billion US dollars in 2017.

The Yale professor’s research also shows the correlation between low savings and high deficits. He cited countries such as the US, the UK and Greece as cases in point. High savings countries including Germany, Japan and China,

tend to have higher surpluses.

That said, deficit spending is not necessarily a bad thing. Nor is America’s trade deficit with China.

In an exclusive interview with CGTN a few years ago, former US Secretary of State Colin Powell said “China sent stuff to Walmart. Walmart sells it. The money goes back to China, and then China lends to us to solve our deficit. A wonderful business cycle. Nobody’s gonna put that at risk. It benefits all parties.”

Colin Powell, former US Secretary of State, Sept. 16, 2015.

Experts point out that throughout history, it’s commonplace occurrence for countries going through industrialization to experience a trade surplus. The US had 93 years of trade surplus between 1874 to 1970. Germany had 84 years of trade surplus starting in the 1880s, Japan witnessed a 30 year straight surplus from 1981 to 2010.

And as China picked up pace in its industrialization process, surplus with the world especially with the US began to occur in the 1990s.

(CGTN)