Who’s to blame for the US Trade Deficit?

Put simply, perhaps the most important reason for the US trade deficit is the US government itself. Allow me to elaborate: bank lending has been growing by about 4% in the past year, while the savings rate and money in circulation have been stable over the past year.

What is left is just government spending. The graph on the top of this post shows evidence of this relationship, supporting the view that a higher deficit (as a percentage of GDP) would be associated with a higher trade balance. The reason is straightforward as higher spending means that more goods and services will be consumed. Many of these goods and services actually have a large percentage of their value imported, a common practice across many companies. In a similar manner, even if the increase in spending goes to social benefits, the argument still remains.

In a simple exercise using data from the Federal Reserve of St. Louis, imports account for about 19% of private consumption, investment, government spending, after adjusting for the import share of exports, suggesting that for a $1 increase in the economy, 19 cents leave the country. If we data just for consumption then this percentage will increase, but let’s keep it on the conservative side.

On the basis of the above, of the $740 billion of government deficit in 2017, approximately $141 billion affect the trade deficit directly, as the government does not really export much. Given that the net trade deficit in 2017 stood at $552 billion, then having just one economic sector accounting for 25% of it is quite much isn’t it? The US should focus more on dealing with the mounting government debt problem than with constraining the economy via trade tariffs.