Friday, January 05, 2007

Spence on the Trade Deficit

Economist Michael Spence (erstwhile Harvard prof) has a nice piece on the U.S. trade deficit and the Chinese exchange rate in today's Wall Street Journal. His bottom line:
it would be useful if we stopped pretending or alleging that China's exchange-rate policies are the root cause of our trade deficit. If our savings rate is stubbornly stuck below our investment rate, and if China does allow its currency to revalue over time, then we will simply run a deficit with another collection of countries, and from a domestic point of view, nothing much will have changed. Except that we won't have this subject to discuss with China anymore.
The linkage among saving, investment, and the trade deficit is a topic that will feature prominently in ec 10 this spring.