The US Truly Faces a Balance of Payments Dilemma
The argument against tariffs was eloquently restated recently, and it’s worth a closer look. There are misconceptions about the issues at hand, a misunderstanding of cause-and-effect, and instead of solid solutions, we get wishful thinking.
Gita Gopinath, an economist from Harvard and former chief economist at the IMF, argues that there isn’t a genuine emergency regarding the balance of payments. She suggests that the decline in the United States’ net foreign investment is largely about valuation—more a concern of numbers than an actual external crisis. Gopinath claims that the real solutions lie in fiscal consolidation from Washington and a shift to consumption in China. She even warns that tariffs could unintentionally create the very crisis they aim to mitigate.
This may sound like just theory, but it has significant implications in the real world. The administration’s latest tariffs, prompted by the Supreme Court overturning last year’s measures, rely on a decades-old law permitting the president to impose tariffs for addressing fundamental payment issues. Detractors are gearing up to argue that the president lacks the authority since the alleged problem may not exist.
Let’s acknowledge that there’s some truth to her first point. The markets still view the US as a safe haven. The dollar’s strength at the start of the Iran war demonstrates this. However, this perspective allows her to counter narratives of panic that aren’t warranted. The previous administration’s push for new balance of payments tariffs doesn’t fluctuate with the current US situation. There’s a clear imbalance; our demand is likely to go abroad, production will shift, and foreign claims on American assets will keep increasing. Just because you’re struggling to make payments doesn’t mean obligations can’t be met tomorrow. It might indicate a gradual loss of productivity.
Gopinath’s analysis shows a concerning regression in net international investment positions (NIIPs). The US’s NIIP—which reflects the difference between what Americans own abroad and what foreigners own here—has sharply declined from around -50% of GDP in 2015 to -89% in 2024. She posits that this reflects how well US stocks are doing compared to foreign ones, inflating the market value of the debt owed to American companies by foreigners.
Yet, even if that’s the case, it doesn’t substantiate her viewpoint. Much of the decline in net debt might be due to valuation, which doesn’t address the flow problem. The US continues to have a substantial trade deficit and a significant current account deficit. Just because American markets are thriving doesn’t make foreign claims to US wealth any less valid. Her analysis hints at another vulnerability: a nation’s increasing reliance on foreign ownership of its assets. We can’t break free from dependence on the stock market; the situation has merely shifted.
Trade Deficits Leading to Budget Deficits
Her proposed solutions also seem inadequate.
The first involves fiscal consolidation in Washington. “Financial soundness” translates to balancing the budget. One can’t help but wonder—what world is Gopinath living in? No chance Congress will touch a balanced budget anytime soon. The tax hikes and spending cuts necessary would be wildly unpopular, and even if enacted, they’d likely lead to a loss of power for the ruling party in the next elections. People may claim to want balanced budgets, but they’re not eager to support the actual sacrifices needed.
And honestly, there’s a solid rationale for this. Our trade deficit almost necessitates a budget deficit. In a balanced trade environment, Americans spend their earnings domestically. However, with a trade deficit, part of national spending doesn’t contribute to national income; it leaks overseas. If this leakage isn’t checked, it means lower incomes and wealth for Americans. To avoid worsening poverty, we need others to fill that gap. As long as foreigners don’t buy American labor products, government intervention becomes essential. Fiscal deficits are the way responsible governments respond to trade deficits.
Gopinath’s approach flips the causal relationship, suggesting that fiscal deficits are the root of current account deficits.
China is Reluctant to Rebalance its Economy
Her analysis of China’s situation appears even less robust. She cites Beijing’s talk of “investing in talent” as a sign that a consumption-driven balance may finally be underway. But the trade data tells a different story. When tariffs pressured Chinese exports to the US, the response wasn’t a boost in domestic consumption; it was redirecting goods elsewhere. Exports simply moved to Southeast Asia, Latin America, Africa, and Europe. China isn’t really rebalancing—just finding alternative outlets for the same surplus.
Even if the Chinese government wanted true consumption-led growth, it would conflict with its political structure. China’s surplus hinges on funneling income away from households toward industry, exporters, and state interests. Household consumption isn’t just declining; it’s being intentionally suppressed. So, a reversal isn’t the aim of the current regime.
What Gopinath seems to overlook is why traditional economic adjustments haven’t taken place. The US has been in a current account deficit for decades without the self-correction that theory would suggest. The dollar remains supported by foreign reserve demand and a strong desire for US assets. It’s here that the essay falters. Mistaking a longstanding situation for one that is benign.
In a narrow sense, as Gopinath emphasizes, the payment dilemma might not seem severe. However, her alternative—waiting for Washington to find fiscal discipline and for China to willingly change its economic approach—is not a real solution. It’s fantasy masquerading as analysis.
