Trump Tweet: “The U.S. recorded its slowest economic growth in five years (2016). GDP up only 1.6%. Trade deficits hurt the economy very badly,” [April 26, 2017]

Martin Feldstein [Head of Ronald Reagan’s Council of Economic Advisers]:

The real reason for the trade deficit? Our spending habits  Published: Apr 26, 2017 1:14 p.m. ET CAMBRIDGE (Project Syndicate)

The United States has a trade deficit of about $450 billion, or 2.5% of gross domestic product. That means that Americans import $450 billion of goods and services more than they export to the rest of the world. What explains the enormous U.S. deficit year after year, and what would happen to Americans’ standard of living if it were to decline?

It is easy to blame the large trade deficit on foreign governments that block the sale of U.S. products in their markets, which hurts American businesses and lowers their employees’ standard of living. It’s also easy to blame foreign governments that subsidize their exports to the U.S., which hurts the businesses and employees that lose sales to foreign suppliers (though U.S. households as a whole benefit when foreign governments subsidize what American consumers buy).

But foreign import barriers and exports subsidies aren’t the reason for the U.S. trade deficit. The real reason is that Americans are spending more than they produce. The overall trade deficit is the result of the saving and investment decisions of U.S. households and businesses. The policies of foreign governments affect only how that deficit is divided among America’s trading partners.

The reason why Americans’ saving and investment decisions drive the overall trade deficit is straightforward: If a country saves more of total output than it invests in business equipment and structures, it has extra output to sell to the rest of the world. In other words, saving minus investment equals exports minus imports — a fundamental accounting identity that is true for every country in every year.

So reducing the U.S. trade deficit requires Americans to save more or invest less. On their own, policies that open other countries’ markets to U.S. products, or close U.S. markets to foreign products, won’t change the overall trade balance.

The U.S. has been able to sustain a trade deficit every year for more than three decades because foreigners are willing to lend it the money to finance its net purchases, by purchasing U.S. bonds and stocks or investing in U.S. real estate and other businesses. There is no guarantee that this will continue in the decades ahead; but there is also no reason why it should come to an end. While foreign entities that lend to U.S. borrowers will want to be repaid some day, others can take their place as the next generation of lenders.

But if foreigners as a whole reduced their demand for U.S. financial assets, the prices of those assets would decline, and the resulting interest rates would rise. Higher U.S. interest rates would discourage domestic investment and increase domestic saving, causing the trade deficit to shrink.