Press Release: New CPA Paper Debunks Trade Deficit Myths

June 21, 2017

Washington ~ The Coalition for a Prosperous America (CPA) released a paper today addressing common but misleading economic arguments that America’s low savings rate causes trade deficits. Authors Michael Stumo and Jeff Ferry show how deliberate action by trade surplus countries like China and Germany transmit to the US in the form of trade deficits that kill jobs and dampen economic growth. The low US savings rate is another result of global trade imbalances, because underemployment and wage stagnation reduces household income. More aggressive and unilateral US action is needed to fix the problem.

“Some globalist economists make the argument that America’s low savings rate and our budget deficit causes trade deficits,” said Michael Stumo, CEO of CPA. “Past administrations have refused to act, in part, on the dubious grounds that addressing strategic behavior by foreign countries would be futile. American consumers simply need to save more money. We hope the comprehensive analysis in this paper puts that argument to rest.”

The paper, entitled “Do Savings Rates Cause Trade Deficits? Examining the Causes of the US Trade Deficit and Global Imbalances,” summarizes the issue in this way. 

Does America’s low savings rate cause trade deficits? Or do trade deficits cause a low savings rate? This working paper explains how to distinguish (a) causation from (b) mathematical interrelationships in the national income identity or equation that underlies this debate. For reasons explained below, real world changes (exogenous factors) outside the identity are the true causes. These real world changes directly impact one or more variables within the identity, transmitting through the equation by mathematical necessity. In short, national savings is related to the trade deficit in an accounting sense but does not cause it.

We further describe how policy or economic changes in trade surplus countries are transmitted to deficit countries. Becoming fluent in identifying true causation and the mechanisms of transmission is important for government officials to select US policy responses that will end global imbalances and domestic stagnation.

“The argument that inadequate savings rates somehow cause our trade deficit is 30 years out of date,” said Jeff Ferry, CPA Research Director. “Deliberate surplus country policies give rise to a global oversupply of labor, capital, and manufactured goods which are the true causes of our trade deficits and declining real wages. The US urgently needs to consider specific unilateral policy responses on trade, currency, and tax because the surplus nations will not stop exporting their excess goods and unemployment to the US until we defend our own economy.”

About CPA: The Coalition for a Prosperous America is the nation’s premier organization working on the intersection of trade, jobs, tax and economic growth. We represent the interests of 2.7 million households through our agricultural, manufacturing and labor members.

Contact: Paola Masman, Media Director 
202-688-5145 ext 2, paola@prosperousamerica.org

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