Politics

Trade deficits are 'inevitable,' says former Fed official

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Key Points
  • Trade deficits are normal, says former Fed official Alan Blinder.
  • "The fact that we don’t save enough compared to what we invest means we have to have this big deficit with the rest of the world," says Blinder, a professor of economics at Princeton University.
  • Meanwhile, President Trump has said the U.S. is "losing" money by way of trade deficits.
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America runs trade deficits because we spend more than we make, says Alan Blinder

Former Fed official Alan Blinder told CNBC that bilateral deficits are "inevitable in trade." He said multilateral trade deficits are a better indicator of global trade activity.

"We should never focus on bilateral trade deficits or surpluses," Blinder, the former vice chairman of the Board of Governors of the Federal Reserve System under President Bill Clinton, said on "Power Lunch" on Monday.

"The fact that we don’t save enough compared to what we invest means we have to have this big deficit with the rest of the world," Blinder said. "America is investing — that’s good. Much more than it's saving — that's not so good."

As a result, Blinders said, "We have to run trade deficits with the rest of the world."

Still, President Donald Trump has said that the presence of a trade deficit means other countries are "stealing" from the U.S. Last month, Trump went after Canada by way of Twitter, saying, "Fair Trade is now to be called Fool Trade if it is not reciprocal. According to a Canada release, they make almost 100 billion Dollars in Trade with U.S."

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Trump has said the tariffs are an effort to fix what he deemed unfair trading practices. Most recently, duties were imposed on $34 billion worth of Chinese goods. Beijing immediately imposed tariffs of its own.

According to the president, the trade deficit is as much as $800 billion, money that the U.S. is "losing." The Commerce Department reported a 2017 total trade deficit closer to $553 billion.

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But Blinder, a professor of economics at Princeton University, said that's not how trade deficits work and that they benefit all countries involved.

Alan Blinder, former Federal Reserve vice chairman.
Brendan Smialowski | Getty Images

Last week, China accused the U.S. of launching the "largest trade war in economic history." But despite investor fears, all three major indices rallied Monday.

Blinder said it is a trade war. "But not every war is World War II," he said.

"If it stops where it is today — which doesn't seem likely, by the way," Blinder said. "But if it stops where it is today, we'll call this a very small trade war, skirmish or whatever. The danger is that it blossoms into something a lot larger."