The US trade deficit has been subject to much debate since the election of Donald Trump. In the previous mini-case, we saw that the deficit is big and in particular with China.
The deficit with China has been growing strongly and steadily over time. It stands out relative to other countries. For example, the US has a trade deficit with Germany, but it is more modest and quite stable.
The question now is WHY does the US have these trade deficits?
To explore the question, we will look at trade balance from the perspective of investments and savings. We will take a deep dive in the standard savings model and see how it enlightens the question.
In this mini-case, picture yourself as Trump’s advisor. You’ve already explained him which key factor drives the deficit. Now, will you be able to explain him how to reduce the US trade deficit, especially with China? Do you think the tax reform which has recently been enacted will help to close it? Undoubtedly, your boss needs your advice.
Try the mini-case and share your answer in the comments!