The right way for US to rebalance trade

The US-China trade dispute could reshape the world's economic and financial landscape. That's not how it looked as recently as May, when a bilateral trade deal was almost within reach. But the United States backed out at the eleventh hour, and tensions have since flared, with the US administration imposing tariffs on a wide range of Chinese exports, and China responding in kind.

With an unprecedented $600 billion worth of goods potentially affected, it is worth considering how useful tariffs really are for correcting current account imbalances, which is the US administration's stated goal. Most economists view trade from a multilateral perspective, focusing on an economy's overall balance with the rest of the world. And the US has been running overall trade deficits since 1976.

The US deficit peaked at 5.5 percent of GDP in 2006, but it usually has been around 3 percent of GDP. At $552 billion in 2017, it is the world's largest deficit in absolute terms. Deficits rise when a country spends more than it produces, which means they are rooted not so much in trade as in domestic savings and investment behavior. In the US, investment accounts for 21 percent of GDP, in keeping with the average across advanced economies (22 percent), whereas savings account for less than 19 percent, which is far below that of the US' peers.