America’s Trade Deficits: Blame U.S. Policies – Starting with Tax Laws
Kenneth E. Austin
University of Maryland
Please cite the paper as:
Kenneth E. Austin, (2020), America’s Trade Deficits: Blame U.S. Policies – Starting with Tax Laws, World Economics Association (WEA) Conferences, No. 1 2020, Trade Wars after Coronavirus, Economic, political and theoretical implications
This conference paper is a follow up to American Trade Deficits and the Unidirectionality Error, (Austin, 2019) which explained that main-stream economists have badly misunderstood or misrepresented the cause of U.S. trade deficits.
For over 15 years, the United States has been locked in an escalating and seemingly endless trade war with political allies and adversaries. Whatever the cause, the consequences of U.S. trade deficits3 have been stark. The deficits helped hollow out American industrial capacity and substantially reduced job creation. This paper makes no political prognosis about changes in U.S. trade policies, but Covid-related supply-chain disruptions have exacerbated these tensions.
The paper shows why reducing American trade deficits requires American policy changes, rather than actions by its trading partners, as is commonly assumed. The only feasible policies to “re- shoring” manufacturing and reduce trade deficits must reverse the policies and incentives that initially drove off-shoring and the deficits. That means reducing the financial inflows that are the root cause of trade deficits. Any other policies are futile and must logically fail. But directly reducing such inflows has been previously unacceptable to American elites and policymakers.
Trade imbalances must equal their financing. That is an immutable identity. But the direction of causality has changed in recent decades. Today, U.S. trade deficits are caused by large and persistent inflows of foreign financing (savings). Because the economics profession’s balance- of-payments theories are based on outdated premises, they mislead policymakers and the public.
Some countries deliberately seek trade surpluses to stabilize and grow their own economies. While U.S. officials complain, those countries walked through doors that the American Government opened and adamantly refused to allow to shut. The best examples are perverse tax incentives for financial inflows, such as 26 CFR §1.895-1 and 26 U.S.C §871(h)(1) that increase the trade deficit. The United States even attracts these inflows by helping foreigners conceal their American income from their home tax authorities.
Effective American policies to reduce U.S. trade deficits will reduce trade surpluses elsewhere. That will implicitly force structural adjustments to reduce the Global Savings Glut at its sources.