Is the U.S. Trade Deficit Caused by a Global Saving Glut?

Publication Date: November 2005

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Economics

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Abstract:

The U.S. trade deficit is equal to net foreign capital inflows. Because U.S. investment rates exceed U.S. saving rates, the gap must be financed by foreign borrowing. The trade deficit has grown over recent years to a record 5.8% of gross domestic product (GDP) in 2004. Economists have long argued that the low U.S. saving rate, which is much lower than most foreign countries, is the underlying cause of the trade deficit and that policies aimed at reducing the trade deficit should focus on boosting national saving. The most straightforward policy would be to reduce the budget deficit, which directly increases national saving.

In an often-cited speech in early 2005, Ben Bernanke, recently nominated to be the chairman of the Federal Reserve, argued that the underlying cause of the trade deficit was not insufficient domestic saving, but rather a "global saving glut." He argued that there was too much saving worldwide, not enough investment demand, and that the United States was the natural destination for this excess saving. In response to the global saving glut, the trade deficit increased, interest rates were kept low, demand for capital and residential investment rose, and the incentive to save decreased in the United States. He argued that because the trade deficit was not "made in the U.S.A.," policy steps to reduce the budget deficit or raise private saving were unlikely to significantly reduce the trade deficit until the global saving glut ended.

The conventional view and the global saving glut view are not necessarily mutually exclusive. To an extent, the difference between the two is tautological -- the conventional view stresses that U.S. saving is too low relative to foreign saving, and the global saving glut view stresses that foreign saving is too high relative to U.S. saving. It is important to acknowledge foreign causes for international capital movements, but in doing so, one should not neglect changes in domestic conditions. Although neither view leads to any hard conclusions about whether the trade deficit is good or bad, the global saving glut suggests reducing the deficit is largely out of American hands.

Contrary to the global saving glut hypothesis, data show that world saving is close to its lowest level in decades. However, low interest rates (although not unusually low by historical standards) suggest that worldwide investment demand is probably low as well. Data also show that most of the change in worldwide saving in the past few years has been due to an increase in government saving in the developing world and a decrease in government saving in the United States. Increasingly, U.S. net capital inflows have been from official rather than private sources, which suggests that global imbalances are not primarily the result of decisions by private investors and that (because of the fall in U.S. government saving) the trade deficit to a great extent may indeed have been "made in the U.S.A."

This report will be updated as events warrant.