Jeffrey Sachs says: ‘A country’s trade deficit (more precisely, its current account deficit) is not an indication of unfair trade practices by the surplus countries. It points to something quite different. A current account deficit means that the deficit country is spending more than it produces. That is, it is saving less than it is investing.’
Yes, that’s how it is. A current account deficit is a current account deficit because it is a current account deficit. Unfortunately, a definition is not an explanation. By definition, no country can spend more than it earns without having a current account deficit. No country can spend less than it earns without having a surplus. One country (the US) lives beyond its means, another (Germany) below them. We still know absolutely nothing.
If a country’s desire to save properly led to current account surpluses, then all countries could have current account surpluses – couldn’t they? Strangely enough, that is impossible. All countries can save like crazy, but they cannot all have current account surpluses. The world’s current account surplus is exactly zero. It follows with compelling logic: you cannot explain a single current account balance with saving (as recently explained here).
What neoclassical economists will never understand: the attempt to explain current account balances with savings and investment decisions is misguided from the outset (as shown in great detail in my recent book, which will be published in English in due course), because the world’s current account balances are a zero-sum phenomenon (the world’s current account balance is always exactly zero). Logically, however, zero-sum phenomena can only be explained by zero-sum factors. This means that the change in the factors that can explain current account balances around the world must also be zero. Zero-sum factors are real exchange rates (i.e. changes in competitiveness), the terms of trade or growth differentials between countries.
In 2008, UNCTAD found precisely that in a large empirical study of the causes of changes in current account balances. Real exchange rates and changes in terms of trade are the key determinants of changes in current account balances. Consequently, the US administration under Donald Trump is absolutely right with its approach, because tariffs change the terms of trade. However, a 20 or 30 per cent depreciation of the US dollar, which would have been accompanied by a significant real depreciation, could have solved the problem much more elegantly.
Incidentally, it is a good idea to propose a free trade agreement with the US with zero tariffs, as the EU Commission has considered and as Elon Musk has also mentioned. Trump will surely accept it if you do what is self-evident but of course overlooked by the EU Commission. The first paragraph of this treaty must read something like this: The partners to this treaty undertake not to seek any surpluses in trade with each other and ensure that existing surpluses are completely eliminated within one year.
Talking about zero tariffs without mentioning the German and European surpluses is idiotic. The attempts to scare the Americans with European countermeasures, as the still incumbent economics minister is doing, are more than ridiculous. In a tariff escalation, the country with the deficit, i.e. the USA, always wins. The country with the largest surplus, namely Germany, will certainly lose. But German and European politicians, as they have done a few times in recent years, have gone completely astray and are incapable of even admitting their wrong decision, let alone correcting it. Sleepwalkers of a very special kind!