Hi, this is Carl Tannenbaum, Chief Economist for Northern Trust. The US trade deficit hit a record $891 billion last year despite a lot of efforts to try and close it. Why is it still so wide? Well, while some were surprised at the lack of progress, there may be a misunderstanding about what causes trade deficits and what can be done to correct them.
A trade deficit means that US consumers are, in general, buying more than our foreign counterparts. And so anything that lifts our consumption relative to others is going to create a trade deficit. Last year, the American economy was stronger than other economies, meaning we were buying more. In addition, countries that spend more and save less will almost always have a deficit with countries that spend less and save more. United States savings rate is about 7%, and China's is about 20%, and that's one reason why we have a trade deficit with them.
Finally, tariffs have a particularly poor track record of addressing trade deficits and here's why. When a tariff goes on, an American importer has to pay it. They may choose to keep their prices level to preserve their market share. So you won't get an adjustment in the trade balance. If they choose to raise their prices, domestic firms may do the same thing. And there, again, there's no realignment of our purchasing of international or domestic products. So that's why tariffs are essentially a tax on consumers and they very rarely realign the competitive balance.
To be sure, some free trade is not fair trade. And that needs to be addressed. But sometimes, trade deficits are perfectly natural. And that's The View From Here.