October 28th, 2011
12:06 PM ET

America's other 87 deficits

Editor's Note: Stephen S. Roach, a member of the faculty at Yale University, is Non-Executive Chairman of Morgan Stanley Asia and the author of The Next Asia.

By Stephen S. Roach, Project Syndicate

The United States has a classic multilateral trade imbalance. While it runs a large trade deficit with China, it also runs deficits with 87 other countries. A multilateral deficit cannot be fixed by putting pressure on one of its bilateral components. But try telling that to America’s growing chorus of China bashers.

America’s massive trade deficit is a direct consequence of an unprecedented shortfall of domestic saving. The broadest and most meaningful measure of a country’s saving capacity is what economists call the “net national saving rate” – the combined saving of individuals, businesses, and the government. It is measured in “net” terms to strip out the depreciation associated with aging or obsolescent capacity. It provides a measure of the saving that is available to fund expansion of a country’s capital stock, and thus to sustain its economic growth.

In the U.S., there simply is no net saving any more. Since the fourth quarter of 2008, America’s net national saving rate has been negative – in sharp contrast to the 6.4%-of-GDP averaged over the last three decades of the twentieth century. Never before in modern history has the world’s leading economic power experienced a saving shortfall of such epic proportions.

Yet the U.S. found a way to finesse this problem. Exploiting what Valéry Giscard d’Estaing called the “exorbitant privilege” of the world’s reserve currency, the U.S. borrowed surplus savings from abroad on very attractive terms, running massive balance-of-payments, or current-account, deficits to attract foreign capital.

The U.S. current account, which was last in balance in 1991, hit a record deficit of $801 billion (6% of GDP) in 2006. This gap has narrowed in the past couple of years, but much of the improvement probably reflects little more than the temporary impact of an unusually tough business cycle.

This is where America’s multilateral trade deficit enters the equation, for it has long accounted for the bulk of America’s balance-of-payments gap. Since 2000, it has made up fully 96% of the cumulative current-account shortfall.

And that is what ultimately makes the China-centric blame game so absurd. Without addressing the root of the problem – America’s chronic saving shortfall – it is ludicrous to believe that there can be a bilateral solution for a multilateral problem.

Yet that is exactly what U.S. officials, together with many prominent economists, believe America needs. Since the trade deficit is widely thought to put pressure on U.S. jobs and real wages, the U.S.-China trade imbalance has come under special scrutiny in these days of great angst. Yes, China does account for the largest component of America’s multilateral trade deficit – making up 42% of the total trade gap in 2010. Conscious outsourcing and supply-chain management decisions by U.S. multinationals play an important role in exaggerating China’s share. But that does little to let China off the hook in the eyes of Washington.

Long-standing charges of currency manipulation provide the proverbial smoking gun that U.S. politicians – of both parties – believe justifies the imposition of steep tariffs on China’s exports to the U.S. (which totaled $365 billion in 2010). That was precisely the argument behind the U.S. Senate’s recent overwhelming approval of a “currency bill” that took dead aim on China.

While it may be expedient to hold others accountable for America’s problems, this is bad economics driving bad politics. In an era of open-ended U.S. government budget deficits and chronic shortfalls in personal saving, America is doomed to suffer subpar savings and massive multilateral trade deficits for as far as the eye can see.

Closing down trade with China, while failing to address the saving shortfall, is like putting pressure on one end of a water balloon. The Chinese component of America’s multilateral trade deficit will simply migrate somewhere else – most likely to a higher-cost producer. That would be the functional equivalent of a tax hike on beleaguered American families – hardly the solution that U.S. politicians are promising.

This is not to ignore important U.S.-China trade issues that need to be addressed. Market access should be high on the agenda – especially for a sluggish U.S. economy that needs new sources of growth, like exports. With China now America’s third largest – and by far its most rapidly growing – export market, the U.S. should push hard to expand business opportunities in China, especially as the Chinese economy tilts increasingly toward internal demand. China should be viewed as an opportunity, not a threat.

At the same time, the U.S. government should come clean with the American public about charges of Chinese currency manipulation and unfair trade practices. The renminbi has, in fact, appreciated by 30% relative to the U.S. dollar since mid-2005. In broad multilateral terms – a far more meaningful gauge because it measures a currency’s value against a broad cross-section of a country’s trading partners – the “real effective” renminbi currently stands about 8% above its most recent 12-year average (1998-2010).

Yes, China continues to accumulate vast foreign-exchange reserves. But this is as much the result of speculators’ “hot money” plays as it is a conscious and perfectly reasonable effort by Chinese policymakers to remain focused on financial stability and manage currency appreciation in a gradual and orderly fashion.

China-bashing in the U.S. speaks to a corrosive shift in the American psyche. It deflects attention away from those truly responsible for perpetuating the greatest saving shortfall in history. The U.S. has been seduced by the political economy of false prosperity. That seduction has allowed America to live beyond its means for nearly two decades. Now the game is up.

The ultimate test of any nation’s character is to look inside itself at moments of great challenge. Swept up in the blame game, the U.S. is doing the opposite. And that could well be the greatest tragedy of all. After all, America’s 88 deficits did not arise of thin air.

The views expressed in this article are solely those of Stephen Roach. Copyright: Project Syndicate, 2011.

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Topics: China • Debt Crisis • United States

soundoff (20 Responses)
  1. Rita Policarpo

    Great article on the trade deficit. What alarms me is the simplification of complex issues which occurs on a daily basis. Analysis is reduced to sound bites. Keep up the good work!

    October 28, 2011 at 12:17 pm |
  2. Reliable

    A scholarly article, written in accordance to objective logic.

    October 28, 2011 at 1:14 pm |
  3. j. von hettlingen

    "The U.S. has been seduced by the political economy of false prosperity. That seduction has allowed America to live beyond its means for nearly two decades".
    True, but there were many sectors in the economy that had contributed to the spending spreee of the Americans. Apart from manufacturers, we have the advertising media and the entertainment business which were also responsible for the spending behaviour of consumers.

    October 28, 2011 at 5:31 pm |
    • seppe

      Right on, I may add that on less we put the brakes on the media there will be no return to civility ,its offensive to admit that less than 10 specimens of a national media are in control of 300 plus million with their life/money/future/and security etc...

      October 30, 2011 at 3:22 pm |
    • Tron
















      November 20, 2011 at 1:56 pm |
  4. rightospeak

    Actually the problem of deficits is not that complex. No savings ? Well ,because our government has anti-saving policy. Lack of jobs ? Importation of SLAVE LABOR PRODUCTS with which we can not and should not compete have killed ( offshored may be a better word ) jobs in this country. To add to the fire of deficits we have been practically in ENDLESS WARS since 1945 that drained our treasure and we have to borrow money from the Chinese at interest. Open borders to allow for an influx of slave labor and visa job programs to lower wages, created over 20 % unemployment – I know , Fareed ,you have rigged figures on that just like on COLA for SS-please do some reading, try Boskin Commision and its dirty tricks. Sometime , you in the media, need to stop whistling Dixie and present to the poblic a REAL picture.

    October 29, 2011 at 11:52 am |
    • seppe

      Dear sir, you are the one that don't care to see the real picture ,and this state of mind is watt got us in to this mess.nice keep it up,THINK ABOUT WATT TO DO INSTEAD OF PUTTING THE BLAME ON SOME ONE ELSE. we the American have invented this way of CONNIVING,and now every body else is bad.ON ONE THING YOU ARE RIGHT, THE MEDIA IS DOING VERY BAD JOB...

      October 30, 2011 at 3:08 pm |
      • Hannibal7

        You are not American. Even the dumest know how to spell "what".... NOT watt. Back to your tent.

        October 31, 2011 at 6:37 am |
  5. That'snotTrue:[

    Wow, an article that addresses the China bashing! Finally someone educated in this section!
    Keep up the good writing and try to educate more ignorants!!!

    October 29, 2011 at 12:48 pm |
  6. ram

    An advisor to President Nixon, Sir Kenneth Galbraith, said something like this:
    There cannot be a period of capital investment unless it is preceded by a period of savings. This was practiced by all nations in the world for centuries, pardon me since the beginning of time, but usa always wants to be the exception, by choice. They've got it! Live with it!

    October 29, 2011 at 2:04 pm |
  7. seppe

    Its time to stop this childish game of blame and finger pointing, no body did this to us ,no body put a gun to our head ,its time to grow up and start doing the right thing for a change...

    October 30, 2011 at 3:32 pm |
  8. Lester

    I actually think this is one of the poorer commentaries I read recently. The whole article depends upon some connection between savings rate and the trade deficit that is never really explained.

    October 30, 2011 at 6:44 pm |
  9. LP69

    The other 87 nations are manipulating their currency.

    October 30, 2011 at 10:45 pm |
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