Taming the US trade deficit: A dollar policy for balanced growth

Joseph Gagnon

No PB20-15, Policy Briefs from Peterson Institute for International Economics

Abstract: President Donald Trump launched a trade war to eliminate the longstanding US trade deficit. But the trade deficit has only grown on his watch because tariffs were the wrong policy choice. Trade deficits are not always a bad thing, but a wealthy country like the United States should not run a perpetual deficit. Decades of US trade deficits have piled up debt that makes future generations of Americans less well off, as they must pay interest and dividends to foreigners. Cheap imports and the decline in exports have also contributed to the loss of a significant number of US manufacturing jobs. The main cause of the deficit is a secular overvaluation of the dollar, driven by excessive financial flows into dollar assets from foreign official and private investors. Although Trump’s policies have failed, achieving balanced trade is not a hopeless quest. President-elect Joseph Biden should direct his Treasury secretary to pursue a more sensible dollar policy that can tame the deficit without violating any international norms or rules.

Date: 2020-11
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