Why Does the U.S. Always Run a Trade Deficit?

Summary

Thomas Klitgaard The obvious answer to the question of why the United States runs a trade deficit is that its export sales have not kept up with its demand for imports. A less obvious answer is that the imbalance reflects a macroeconomic phenomenon. Using national accounting, one can show deficits are also due to a persistent shortfall in domestic saving that requires funds from abroad to finance domestic investment spending. Reducing the trade imbalance therefore requires both more exports relative to imports and a narrowing of the gap between saving and investment spending. Grounded by Accounting To give some intuition for why the trade deficit is equal to the gap between saving and investment spending, assume the U.S. economy is closed to the rest of the world. That is, there are no imports or exports. Spending is either on the consumption of goods and services or investment spending on equipment, structures, and intellectual property products. Income is allocated to either consumption or to saving by households, businesses, and government. In a closed economy, spending equals income—that is, the sum of consumption and saving equals the sum of consumption and investment spending. Spending (Consumption + Investment Spending) = Income (Consumption + Saving) Because consumption drops out on both sides of the equation, investment spending equals domestic saving in the economy. This makes sense: the funds available to invest in productive projects have to come from domestic savers. Opening up the economy to external borrowing or lending allows domestic saving and investment spending to diverge. In the case of the United States, the economy borrows from the rest of the world because domestic saving is insufficient to fully finance investment spending. Investment Spending = Domestic Saving + Foreign Saving (through net financial inflows) So how is the saving gap connected to international trade? If imports and exports are equal, then the revenue earned from exports matc...