The US Trade Deficit Is America's Problem, Not China's

This week, Treasury Secretary Scott Bessent criticized China in a speech, stating that its "export-led manufacturing model" and significant and persistent trade surpluses are unsustainable, and emphasizing the need for a global rebalancing. Yet, US must take ownership of its trade deficit, as it operates under a "consumption-led" growth model, which means that rebalancing trade necessitates substantial changes within the US.

If Mr. Bessent is serious about fundamental trade rebalancing he could initiate this by compelling Congress to approve a credible fiscal deficit reduction plan, which would curb demand growth—a crucial element of trade rebalancing.

However, the Republican-controlled Congress, with the Administration's support, is pushing forward a budget proposal that cuts taxes and increases federal deficits, thereby boosting US demand growth. As a result, if this budget plan is approved, the potential turmoil in the bond market would be significantly more intense than the response to Trump's tariff announcement.

US Trade Imbalance ---The Facts

In the United States, the gross value of manufacturing is estimated at $7.2 trillion, while the gross value of imported products is $3.2 trillion. This indicates that the US consumes approximately one-third more than it produces annually. The sheer magnitude of the disparity between production and consumption suggests that it will take years, if not decades, to rectify.

Complicating matters further is the fact that US companies are involved on both sides of the trade, which makes any trade adjustment due to high tariffs painful for US companies and consumers.

An additional complicating factor is that the Trump administration overlooks or ignores a fundamental cause of the US trade imbalance: the substantial and persistent federal deficit. The US government currently spends roughly $2 trillion a year more than it takes in revenue. Over two-thirds of federal spending is directly or indirectly feed into people's pockets, which in turn fuels demand.

The Trump administration is reportedly involved in several trade negotiations aimed at adjusting the supply in trade flows, while avoiding the more difficult task of adjusting demand through fiscal measures. As a result, trade deficits are likely to increase because trade agreements require many months to negotiate and even more years to bring about significant changes, while budgetary changes fuel current spending.

CEO Ken Griffin recently stated that Trump's tariff strategy has "harmed" America's "brand" and the United States' creditworthiness. If this is accurate, America must understand that any effort to persist with a "consumption-led model" and substantial, ongoing federal deficits will be rejected by the bond market, leading to a greater increase in yields than what occurred following Trump's tariff policy announcement.