Deficits and surpluses indicate the relationship between savings and investment and have nothing to do with trade policy, a Columbia University economist said Friday, criticizing the United States' approach to resolve trade imbalance.
At a symposium on multilateral trade and globalization at the United Nations headquarters, Jeffery Sachs said neither deficit nor surplus "has much, if anything, to do with trade policy."
If a country is running a current account deficit, that means it has gross investment greater than national savings, Sachs said. If a country is running a current account surplus, that means it has national savings in excess of gross domestic investment.
The scholar said the fact that China runs a surplus indicates it is providing savings for investment in other parts of the world, while the United States is having deficits because it is borrowing funds from the rest of the world.
Sachs' remarks came at a time when Washington and Beijing are locked in trade disputes that have seen the two countries engage in tit-for-tat tariff measures.
"There is nothing wrong with a current account deficit or surplus. This is net international investment or borrowing from the rest of the world," Sachs said, adding that there is no need for countries registering surpluses to apologize.
The United States, according to him, should better look inward to search for the reasons that caused the deficit, instead of complaining that "somebody must be cheating the U.S. in trade policy".
"Is our deficit a result of insufficient savings, or especially high levels of investment? Is it warranted to borrow from the rest of the world? Or should a deficit be adjusted by raising the national savings rate for example?" he said, listing a number of questions countries in trade deficit should ask themselves.
Sachs said the root cause of America's sense of loss lies not in trade but in the failure of income redistribution, which should have ensured that the gains from trade are widely shared.
"Unfortunately, in the United States we redistribute from the poor to the rich, not from the rich to the poor," he said.
Warning that to end trade would be to shrink the world economy dramatically, Sachs said the answer is to combine open trade with income redistribution policies, while striving to narrow income inequalities.