Opinion | Is multilateral perspective the right approach for US and China to correct trade imbalance?
- The multilateral perspective makes clear that the US current-account deficit can be reduced only through structural reforms to address the imbalance between domestic savings and investment
- China’s adherence to the multilateral perspective on trade has led it to reduce its external imbalance through structural reforms
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 US 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 US$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 per cent of gross domestic product in 2006, but usually amounts to around 3 per cent of GDP. At US$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 behaviour.
In the US, investment accounts for 21 per cent of GDP, in keeping with the average across advanced economies (22 per cent), whereas savings account for less than 19 per cent, which is far below that of America’s peers.
The US current-account deficit can be reduced only through structural reforms to address the imbalance between domestic savings and investment
The US savings rate reflects both public- and private-sector behaviour. The personal saving rate was as low as 3 per cent in the run-up to the 2008 financial crisis, after which it edged up to 7 per cent – a rate still far below that of the early 1990s.