International Finance and Financial Policy

By Hans R. Stoll | Go to book overview

5
The U.S. Trade Deficit and the U.S. Fiscal Deficit: Cause and Effect

ROBERT Z. ALIBER


INTRODUCTION

One of the most paradoxical events in international finance in the 1980s is that the United States has shifted from being the world's largest creditor country to the world's largest debtor, even though the U.S. government has not borrowed in a foreign currency and only a few U.S. firms have borrowed in a foreign, currency. The change in the U.S. international investment position reflects that foreign investors have been large purchasers of U.S. dollar securities and U.S. real assets. At the same time, the United States has incurred large trade and current account deficits. This combination of large U.S. trade and current account deficits and large foreign purchases of U.S. dollar securities leads to two questions. The first is whether the U.S. trade deficits (or the factors that caused these deficits) induced or attracted the foreign purchases of the U.S. dollar securities, or whether the foreign purchases of U.S. dollar securities caused the U.S. trade deficits. The second and derivative question is whether the disequilibrium that led to these large trade and capital account imbalances originated in the United States and reflects some combination of the large fiscal deficits and the low savings rate, or whether the disequilibrium originated in the trade surplus countries and reflects some combination of their high saving rates and their macroeconomic policies.

The central proposition of this paper is that the United States developed large trade deficits because Germany and Japan have configured their macro policies to achieve large trade surpluses--their realized trade surpluses in the 1980s have not been larger than the trade surpluses that they have preferred. Global consistency means that if Germany and Japan achieve the targets for their trade surpluses, all other countries as a group must have comparably large trade

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