As Drezner is an offshoring advocate, I suppose he would argue that the fact that it's hard to buy anything at our largest retailers which is "Made in the U.S.A." has absolutely no connection our current account deficit.

Yeah right!

Is this a trick question, Dan? Do you really think that the trade deficit could be caused by inadequate savings in the US compared to other countries? Among the possible explanations you list, you fail to mention the simple fact that Americans buy more foreign products and services than we sell because they're cheaper. And the Arabs, Indians, and Chinese have nowhere else to put the money except in the US bond market. In long run, of course, this trend will drive down the US dollar and help balance things out. But then, in the long run... how does that go?

Why, though, would you have a global savings glut at a point in time where large and relatively underdeveloped economies (China, India) have reached the takeoff point and need lots of capital investment internally? Isn't it rather bizarre that every spare $ China has isn't being spent on capital equipment rather than being invested in treasuries?

How about none of the above? I'd say the reason for our current accounts balance is that the U. S. economy has undergone a fundamental shift (from producing goods to services) without the necessary shifts in foreign policy (enforcing intellectual property rights and gaining entry into overseas services markets).

Hi, Dan. I'm sorry for the OT comment, but I just had an experience about a half an hour ago that immediately made me think, "What would Dan say?"

I was sitting at an IHOP having lunch, and a guy in the booth across the aisle from mine fielded a call on his cell phone. In five minutes he had made an agreement to get a bid on outsourcing five customer service reps.

It was really astonishing. Normally outsourcing is pretty remote, I was surprised to have it served with a side of fries.

At the time he was speaking I had finished my lunch and had opened my laptop to take down an idea I had for my book. I had Notepad open, and I type pretty fast. Here's what he said. Amazing. It was all done in five minutes, no more.

In response to David Forester: I remember reading in the Economist (some time ago when there was a special secion on China. Ring a bell with anyone?)that China's savings rate was too high and that there was too much money chasing too few sound investments. And too little domestic demand for Chinese goods. The article warned that loose lending practices were creating overcapacity in many sectors and leaving Chinese banks with lots of non-performing loans in their portfolios. If this is true, it would make sense that, in China at any rate, there might not be enough capacity to soak up investment. I don't know about India. Of course, China's investment in American bonds is an intentional policy to keep the Yuan from slipping to allow their current trade surplus to continue and allow their economy to absorb rural-urban migration and workers from the rickety state sector.

The current trade deficit is a human thing.
It reflects a failure of will. Capitalism used to demand ever increasing profit. About 30 years ago, however, managers became frightened by the ever increasing investment (and the risk) needed to achieve the profit increase. Whole factories would have to be torn down and replaced with the latest technology to offset the advantage of lower wage overseas producers. With stagnant production the managers first turned to incremental productivity increases, to direct government subsidies, and then to outsource production which explains the trade deficit.
The only American company that has resisted this trend has been Scaled Composites.

Today we have 17 % of the workforce employed in the manufacturing sector as compared to 15, 20 years ago 25%. I say not enough domestic manufacturing jobs and domestic consumption to go along with it.

I'm surprised that no one has mentioned the skyrocketing price of oil. We haven't reduced our consumption of imported oil (IIRC, its increased) even though the price has gone up considerably.

As for the nonsense about US Savings rates...what bollocks. Sure, if US consumers were spending less, they'd be spending less on imports --- but they'd also be spending less on domestically produced goods as well. If that happened, the US economy would go into another recession, which of course would translate in to further reduced demand for imported goods. In other words, the "savings" argument is nothing more than blaming the trade deficit on the "failure" of the US economy to be recessionary.....

When I read a post like this one, and there are many others quite similar, I am left with one thought.

He/she understands almost nothing about the effects of world trade policies and U.S. incentives for corporate interests to go offshore.

The bulk of such nonsense is little more than trying to find a way, any way, to avoid discussing the implications of trade policies and corporate-oriented incentives which create the conditions for most imbalances we are witnessing. The financing for many of the other imbalances would not exist if not for the growing U.S. trade deficit.

Dan states that "the U.S. trade balance is the tail of the dog" of U.S. current account problems. He has stated it exactly backwards.

Dream on, Dan. And keep looking for those excuses to not discuss the impacts of trade policy decisions.

From my perspective, a global savings glut couldn't possibly be the cause of our C/A deficit because the C/A deficit is ultimately a function of US demand. Surplus global savings don't create that demand, although they may facilitate it. It's not like US consumers got together and said, Hey, let's help out these poor schlubs with too much savings. On the contrary, they individually said, I want a new, e.g., flat panel TV and I don't have enough cash to buy one so I'll have to charge it. To the extent that a global savings glut lowers interest rates, thus stimulating US demand, you could argue that it causes the C/A deficit, but I think that's a stretch.

Pack for warm weather, Dan. It's hot as hell over here.

Here's an old Wall St. Journal article I found interesting (sub'n req'd):

Economists, puzzled that a weaker dollar hasn't done more to shrink the U.S. trade deficit, think one reason may be the growing flow of goods moving between the foreign and U.S. divisions of large multinationals.

Forty-two percent of all U.S. trade in goods, $950 billion last year, occurs between arms of the same companies, including U.S.-based companies trading with their foreign divisions as well as foreign companies trading with their U.S. arms. Nearly 90% of U.S. imports from Ireland are such "related party" trade, as are 74.6% from Singapore, 62.1% from Germany and 61.1% from Mexico.

"When so much of trade is related-party moves, the determining driver is demand in the U.S., not shifts in exchange rates," says Joseph Quinlan, chief market strategist of global wealth and investment at Bank of America.

Dan,

The so-called global savings glut is really a result of anti-growth policies in areas with lots of savings, such as Europe and Japan. Those savings cannot be productively invested locally so they come here.

While those areas had such problems before, globalization has made it easier for the under-utilized savings to come here for a better return.

Note that China has lots of savings too, but those are being locally invested. At least until now. China seems to be hitting a wall of export-driven growth, so it might start having problems with under-utilized savings such that those come here too.

Ideally the rest of the world would stop their stupid anti-growth games. But that won't happen. Their governments and ruling elites find domestic enonomic growth to be a threat to their power. In Europe, notably in France, much of the population agrees with the anti-growth polices.

Significant economic growth means change, and change is a threat to the status quo. Lots of interest groups, elites and sometimes a majority of the population prefer the status quo.

Until those economically irrational factors abroad are addressed, economically irrational things like our trade deficit will happen.

"People do not behave like money!" - said by either Professor Irwin Corey or Herr Doktor Professor Ludwig von Drake.

Oops, I meant that significant economic growth caused by domestic demand threatens the status quo, as opposed to economic growth driven by exports.

It's growth in domestic demand which threatens vested interests and such. Export driven growth is less threatening because it is easier to control.

At its simplest, primal level, the trade policies of Bush/Clinton/Bush go something like this:

The US will encourage the destruction of millions of manufacturing jobs so we can all go to Wal-Mart and buy cheap underwear.

There is a trade deficit because we don't make much anymore, we gave those jobs away and threw the workers on the trash heap of history. After all, they are not part of the elite, so who cares?

S-I=X-M

"Economists, puzzled that a weaker dollar hasn't done more to shrink the U.S. trade deficit..."

Given that they have been puzzled by precisely this same combination for the past 25 years, I would suggest that either they invent some new facts or perhaps consider that their theories are better suited to a parallel universe.

actually, a weak $ at the end of the 80s/ early 90s did shrink the trade deficit, and a strong dollar at the end of the 90s led it to expand. right now, the dollar is only really weak against the euro -- it is strong against most emerging economies, and the global pattern of trade has changed in ways that make the euro/$ (and the pound/ dollar) less important in determining the us trade balance. throw in some changes in savings behavior in the us that offset the impact of a (not really) weak dollar, and i don't think the absence of a stronger trade response is all that much of a surprise.

one part of the WSJ argument is probably true -- with more trade between different parts of an MNC, the impact of XRs will come through the impact on MNC sourcing decisions, and that may introduce longer lags.

still, change the RMB/ $, and, after the standard two year lag and j-curve effects, i suspect the US trade deficit would be significantly lower than it would be without any change. markets work through adjustments in relative prices.