Charts of the Week: Leading with a Trump

Global current account imbalances Global current account imbalances have continued to shape President-elect Trump’s views on the world economy, particularly in his belief that trade deficits and imbalanced trade relationships are detrimental to US interests. Trump has long viewed large US trade deficits as evidence of "unfair" trade practices by other countries, notably China, Germany, and Japan. He contends that these countries manipulate trade policies, tariffs, and exchange rates to sustain their own current account surpluses at the expense of the US economy, which he sees as absorbing excessive imports and struggling to export competitively in return. As chart 1 below suggests, there was little-to-no narrowing of the US current account deficit (relative to GDP) during Trump’s first term in office from 2016-2020. And since that time the deficit has widened a little and, according to the IMF, is on track to reach 3.3% of GDP in 2024. Allied to this, there has been little net change in the current account surplus position of some of the big creditor economies over the past several years, namely China, Japan and the euro area.

US financial balances Some economists (e.g. Michael Pettis*) argue that instead of imposing higher tariffs on the trade in goods, capital controls should be instigated in order to limit foreign purchases of American assets. Still, as chart 2 below suggests, this may not resolve other persistent domestic imbalances in the US. High private savings and limited investment, for example, may instead reflect an ageing population and a structural pivot toward a services-led economy. Equally, large fiscal deficits mirror heavy government spending on areas like healthcare. President-elect Trump’s plans for looser fiscal policy via lower corporate taxes could also widen this fiscal deficit even further, intensifying the economic challenges in the period ahead.

Financial market depth Why do surplus countries channel their savings into the US? This is probably because of limited opportunities to invest domestically, insufficient financial market depth and the prospect of a lower return on investment. The US, in contrast, has deep, liquid, and relatively high-yielding financial markets, making it an attractive destination for these surplus savings (see chart 3 below). The US dollar’s role as the world’s reserve currency is also significant. Absent policies that shift the relative attraction of US financial markets and the US dollar’s reserve status there are additional reasons for believing that the status quo for global imbalances could persist.

Overseas holdings of US Treasuries The above notwithstanding, overseas demand for US financial assets – and Treasuries in particular - may wane in coming months should US policy become more protectionist and/or if US fiscal policy were to be loosened. In recent years, foreign ownership of US Treasuries has seen fluctuations. For instance, China's holdings have declined from their peak around 10 years ago. More specifically, in November 2013, China held approximately $1.316 trillion in US Treasuries, marking its peak ownership. But by August 2024, this figure had decreased to $774.6 billion, representing a reduction of about 41% over that period. Elsewhere, Japan has remained a major holder over the same time frame. Indeed as of August 2024, Japan was the largest foreign holder, with approximately $1.129 trillion in US Treasuries, about 13% of the foreign-held stock.

Global trade policy The primary policy tool which a new US administration is likely to address imbalances is higher tariffs. But while this would directly raise the cost of bilateral trade, it could also have far-reaching effects on global supply chains. As a major player in global value-added trade, the US contributes significantly to international markets, with high-tech products comprising a notable portion of its exports. Reflecting its advanced manufacturing base, the US adds substantial value to imported inputs, shown by its high domestic value-added share of gross exports. This underscores that much of the value in US exports is generated domestically. Moreover, with moderately high forward participation in global value chains, the US remains a crucial supplier of intermediate goods, underpinning its central role in global production networks.

US energy policy A further route via which US policy shifts could exert a global economic impact concerns the energy sector. A new administration purportedly plans to aggressively expand domestic energy production by lifting restrictions on oil and gas drilling. That strategy is designed to lower energy costs and reduce inflation. Per capita electricity generation in the US is relatively high compared with many European economies. The share of renewables in generating that electricity, in the meantime, is relatively low (see chart 6). The current position in the US, in other words, implies challenges and opportunities to shift toward renewables. Equally, maintaining the status quo (or putting it into reverse) could generate climate-related consequences, and at the very least, meet with much global resistance.