The United States' large trade deficit has been a cause for concern for many onlookers. Yet the debate about what is causing it and how to correct it misses the forest for the trees. While pundits and politicians often attribute trade imbalances to a nation's competitiveness or technological prowess, the uncomfortable truth is that the trade balance of a country is fundamentally shaped by the distribution of income within its borders.
This means that trade surpluses are not the result of superior trade practices or technology but are instead a product of weak domestic demand relative to domestic production. Trade surpluses are built on workers in a country being paid less than their productivity would otherwise suggest. In theory, if income were to be sufficiently distributed in a given country, where the workers could consume all that they produce, then that country's exports would match its imports. This is because, in the global trading system, exports must equal imports. Everything sold needs a buyer.
Countries that run trade surpluses have a savings rate that exceeds domestic investment. How are these large savings rates sustained? Some explanations rest on the idea that countries with higher savings rates relative to domestic demand are culturally thrifty or attribute the reason to other immeasurable factors. Yet this reasoning fails to account for the unbalanced distribution of income in surplus countries. The way surplus countries achieve and sustain such large savings rates is by redistributing income away from the people in the economy who would consume most of their income to those who would save a larger portion of their income.
To conceptualize how this distribution works, we can think of four buckets within an economy that can retain income generated from GDP: average households, very wealthy households, private businesses, and governments. Average households consume most of their income and save only a small portion, while the other three save most of their income and consume little to none of it. To achieve high savings rates, income must be redirected away from average households to elites (the wealthy, businesses, and governments). This can happen in several ways: through taxes on average households, devaluation of the exchange rate, disempowerment of labor unions and workers, or even weak environmental regulations.
In short, economically unequal countries should have savings rates that exceed domestic investment, resulting in a trade surplus. The United States currently faces infamous levels of economic inequality, with labor productivity far exceeding wages since the 1980s. However, the United States also runs large trade deficits. Why does this trend not apply to the United States? The simple answer is dollar hegemony.
The U.S. dollar (USD) serves as the world reserve currency and the currency used for most international trade, two interconnected yet distinct roles. Due to these roles, the USD is, for the most part, readily available for foreigners to use, accumulate, and purchase assets with. This open financial system attracts savings from around the world, particularly from countries with savings rates higher than investment rates, into the United States. This phenomenon strengthens the value of the USD (making exports more expensive and imports cheaper, thus increasing the purchasing power of Americans) while simultaneously infusing the U.S. financial system with capital. This capital influx reduces borrowing costs for Americans and American institutions, both private and public.
Reference(s):
cgtn.com
