Do Low American Savings Rate Cause Trade Deficits?

Mainstream trade news continues to assert that trade deficits don’t matter. Economists help reporters write these fake news stories by claiming that America’s failure to save money is the problems, not foreign trade cheating. On June 20, 2017, the Coalition for a Prosperous America released a research paper titled “Do Savings Rates Cause Trade Deficits? by Michael Stumo (CEO) and Jeff Ferry (Research Director) that shows why globalist economists are wrong about what causes trade deficits, offshoring and job losses.

They write, “A popular, but misleading, claim is that low US savings, relative to investment, causes our trade deficit. For exam­ple, Harvard professor and former Reagan administration advisor Martin Feldstein.has said that the US fiscal defi­cit, which indeed reduces national savings, is the cause of the trade deficit. ‘If a country consumes more than it produces [thus saving little], it must import more than it exports.’”

These macroeconomists “claim that Americans spend too much, save too little, produce too little, and thus must import to support their gluttony.” They are incorrect.

White House economists use the “savings rate causes trade deficits” claim to create the false illusion that nothing can be done. But the real problem is that a few foreign countries – like China, Japan, Germany and South Korea – have economic strategies to overproduce, under consume and ship their overcapacity to the US. Their growth strategy is their full employment program. They export their unemployment to the US.


To macroeconomists, the ”National savings, investment and net trade are variables within equations or formulas known as ‘national income identities’. Because the variables are within the identity, they are called “endogenous’ and are explained by the equation.” But they do not explain what causes the changes.

“The basic Gross Domestic Product equation is referred to as a national income identity, expressed in the following equation:

GDP = C + I + G + NE

C = Consumption; I = Investment, G =  Government and NE = Net Exports. Net Exports are also expressed as X – M in another version of this equation. When the Net Exports is a negative figure as it has been since 1979, this reduces the GDP.  According to previous research by the Coalition for a Prosperous America, “the annual trade deficit has reduced each year’s GDP by some 3% to 5.5% each year, and those reductions compound over time.”

The purpose of the paper is to explain “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.”

Government policies often affect each one of the variables of the above equation. For example, the income tax rate may affect Consumption.  If rates are high, then American consumers have less money to devote to consumption.  If Government consumption and expenditures through procurement is down as it was under Sequestration, then companies that sell to the government make less money and have less money to buy products as business and corporate consumers.

To clarify the relationship between savings and trade deficits, the authors cite Robert Scott of the Economic Policy Institute: “Accounting identities do not, and cannot, explain the causal relationships between savings, investment, and trade flows. Do low savings rates cause trade deficits, or does causation run in the other direction? A trade deficit reduces the incomes of domestic workers, pushing many into lower income brackets. Families with lower incomes gen­erally find it much harder to save. Therefore, increasing trade deficits can and do reduce national savings.”


International economists in important positions “im­plicitly argue that no policy action is necessary or effective because US citizens simply do not save enough. We have caused our own problem. Our immoral, gotta-spend-it-now culture must become more austere.”

However, the authors explain that “National savings, in the context of the national in­come identity, is the aggregate of household, business and government savings. It is the extent to which national in­come exceeds private and public spending.

Household savings can, for example, go down if family earnings fall but they spend the same as before on necessities. Taxes or interest rates could go up causing con­sumers to spend less. Neither cause has anything to do with financial morality.”

Instead, government policies can and do affect savings rates. The authors state, “Surplus countries such as Germany and China have been deficit countries in the past… with low savings rates and trade deficits. Their cultural propensity to spend or save did not miraculously change…policy changes in the 1990’s and 2000’s caused trans­fers of wealth from households to industry forcing less consumption and more production at increased scale and with very competitive prices. The result was more national savings and trade surpluses.”


The authors show how the oversupply (overproduction) of some countries is transferred to other countries causing them to become deficit countries.  They write; “All countries cannot run trade surpluses. Offset­ting deficits must exist elsewhere. The primary reason for a country to engineer persistent surpluses is to spur domestic employment by excessive reliance upon foreign consumers. The deficit country, however, experiences de­valuation of its formerly well employed labor.”

They point out that in 2005, “then-Federal Re­serve Board chairman Ben Bernanke argued that the large and growing U.S. current account deficit is caused not by anything happening in the U.S., but by decisions taken by emerging economy nations to run very high savings rates, pursue export-led growth, and lend money to other countries, especially the U.S. He called the situation a ‘global savings glut.’ These excessive inflows of foreign savings raise the U.S. dollar exchange rate, drive down our interest rates, and force our economy into a trade deficit.”

The method by which this transfer takes place is described by Professor Michael Pettis, quoted in the paper:

“If any country takes steps to change the gap between its total domestic savings and its total domestic investment, then those steps must also affect its trade balance. Because a change in one country’s trade balance must be matched with an opposite change in the trade balance of all other countries, there must also be an opposite and equal change in the gap between the total domestic savings of the rest of the world and the total domestic investment of the rest of the world.”

Other factors affecting this transfer are “wage suppression (intentionally as in Germany) or because high volumes of new workers are entering the labor market (as in Asia) and redirect household resources to investment. The result is that productivity increases faster than wages. Increased production outstrips the ability of domestic households to consume. Domestic supply exceeds demand and the coun­try must rely upon foreign consumers to soak up the excess.”

What Tactics Do Surplus Countries Use?

The authors explain that “Export-oriented or investment-oriented countries can utilize policies to reduce consumption, increase pro­duction and export at very competitive prices.”


  • Wage growth is constrained to well be­low the growth in worker productivity
  • Undervalued exchange rate…for much of the past two decades
  • Government subsidizes Chinese manufacturing exporters
  • Financial repression of Chi­nese households
  • Vast amounts of surplus labor that produces more than it consumes.

In essence, the authors state “They export oversupply, deflation and unemployment. The result is excessive reliance on demand from consum­ers in deficit countries.”


  • Holds down domestic wages
  • German banks provide direct loans and vendor financing to foreign countries to buy German products
  • Impose a 19% consumption tax (VAT) that is rebated to exporters

As a result, “The eco­nomic distress caused by the German-policy-induced cri­sis in other eurozone countries perversely holds down the value of the euro” making Germany’s exports more price competitive in the global marketplace.


The authors present the following recommended solutions to reduce trade deficits:

  1. Fix currency misalignment, especially the overvalued dollar.
  2. Implement a US consumption tax, such as a goods and services tax (GST), in a revenue neutral and distribution neutral way by completely offset­ting the payroll tax burden.
  3. Adopt a territorial business income tax called sales factor apportionment (SFA)
  4. Consider broadly applied tariffs to counter the unearned ad­vantages of trade surplus countries
  5. Apply selec­tive tariffs to high value or strategic products that the US wants to produce

In conclusion, the authors state: “…the level of US savings and invest­ment cannot and do not ‘cause’ our trade deficit. The true causes are surplus country policies, misaligned exchange rates and global labor oversupply. Persistent trade surplus countries export their oversupply and unemployment to deficit countries characterized by open economies and open financial markets. Policy leaders must become adept at determining the actual causes, how they are transmit­ted through national income identities and how they re­sult in imbalances. Effective policy responses can then be designed to rebalance trade and capital flows, increase US employment and restore our economic growth.”

The paper shows why America’s economy grew when the majority of manufactured goods were Made in America and consumed by US consumers.  The wages paid to the manufacturing workers who produced these products allowed them to save more because they earned more. When the U. S. lost 5.8 million higher paying manufacturing jobs from the 2000 – 2010 because American production was offshored to China and other Asian countries, American workers no longer had any money to save. The overproduction of trade surplus countries resulted in a glut of cheap imported products that further depressed or destroyed some American manufacturing industry sectors. The cheap imported goods that consumers bought became a curse rather than a blessing.

Therefore, the preposterous premise of many macroeconomists that low savings create trade deficits was proven false. It is incomprehensible to me why macroeconomists don’t understand that you can’t save if you don’t have a job or your non-manufacturing job is paying way less than your manufacturing job did. This is why I strongly support the recommended policies of the Coalition for a Prosperous America and urge you to do so also.

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