Trade deficits are not created in the US
For decades, American policymakers were given a brief talk about trade: The US will run a permanent deficit because it is not saving enough. If only Americans were more modest and the federal government controlled spending, the trade deficit would be reduced and manufacturing jobs would return.
This is the discussion Maurice Obcefeld Made in Essay of Financial Times yesterdaydismisses President Donald Trump's latest tariffs, in his view, as a false attempt to resolve issues that can only be resolved by reducing budget deficits and boosting national savings. However, this standard economic narrative ignores one important fact. The US trade deficit is not just a domestic issue– It is driven by foreign economic policies designed to curb consumption overseas and flood the US with excess savings.
Chinese veteran analyst Michael Pettis took him to X on Wednesday, Dismantling Obstfeld's discussion by revealing the biggest blind spot: Assuming that only the US has an institution of global trade disparity. The reality is that China, Germany, Japan, and other surplus countries actively shape these imbalances through policies that curb wages, limit domestic consumption, and push excess savings into the global economy.
The real cause of trade imbalances
Obcefeld claims that the US operates the trade deficit simply because it spends more than the Americans produce. But that's what he ignores Foreign countries, especially China – designing their economy to produce more than they consume. Beijing implements high savings rates by curbing wages, limiting household wealth, and directing cheap credit to state-owned businesses rather than consumers. These excess savings do not end in China. Instead, they flow outwards in search of destinations.
Where will they go? Because America has the world's most open capital market. As Pettis explains, when China accumulates large surplus, they must be absorbed somewhere. That means an automatic increase in the US trade deficit. The problem isn't that Americans are reckless spenders. That one Foreign governments are flooding the system with cheap capital, inevitably creating a deficit.
The scale of the imbalance is incredible. The United States has been experiencing a permanent trade deficit since the 1970s, ending in 2024 with a commodity trade deficit of approximately $1.2 trillion. The trade deficit alone in December 2024 was $98.43 billion. If this were simply inadequate US savings, we would have seen these deficits fluctuate significantly over the years. Instead, their persistence suggests something else in the workplace –Foreign merchant policy It rigs a global system that is beneficial to them.
Why you need customs duties?
If the US trade deficit is imposed by foreign intervention rather than by the US choice, tariffs are not merely an economic tool. Defense Scale. Trump administration's tariffs on China, Mexico and Canada are part of a broader strategy to enforce surplus countries Stop distorting global trade and capital flows.
Obstfeld has rejected tariffs as ineffective and claims it will not reduce the trade deficit or regain production. However, this assumes that the tariffs operate in a vacuum. In reality, tariffs are one of the broader efforts to combat foreign economic distortions. Without them, the US simply forgives itself Dumping sites for surplus production in other countries.
Takes China's economy away. That massive trade surplus is not the result of the natural free market forces. This is a direct result of Beijing's industrial policy, the state-controlled banking system, and currency interventions. The only way to change this is It makes China feel the cost of its own policy. Customs taxes increase their costs. They force China to rethink consumption and US to rethink whether the strategy of killing cheap goods is sustainable.
Rebuilding the economic sovereignty of America
The core issue here is not just the trade deficit, but the economic sovereignty of America. For decades, the United States has forced foreign countries to determine their economic realities. It allowed China to become a factory of the world and took away industrial bases. We have accepted the trade deficit as an inevitable outcome of globalization. And we are the way that foreign capital distorts our financial system, driving bubble and debt-driven growth.
Trump's tariffs challenge this status quo. They are the perception that America cannot lock its economy without facing policies in surplus countries that have been fondly excavating the system for decades. Obstfeld's solution – some kind of intervention aimed at reducing our spending and increasing savings – The US cannot save the economy like China, where savings rates are artificially swelled due to government intervention. It also involves much more economic intervention than simply addressing trade imbalances head-on.
The real solution is Global trade and capital change so that the US economy is no longer merciless with foreign commerce.. As a first step, it means tariffs and a type of conservative industrial policy of tax cuts and deregulation that Trump advocated in his address to Congress on Tuesday. It means rejecting the idea that America's economic fate is determined only by domestic policy decisions. And that means recognizing that in a world where other countries play with different rules, America has the right to protect itself.
