The prime minister of Singapore is really not cool with Donald Trump’s tariffs. In a Washington Post op-ed this week, Lee Hsien Loong condemned Trump’s trade barriers as “not the correct solution.” His key point:
As economists have pointed out, when assessing economic relationships, what matters is not a country’s bilateral trade balance with a specific trading partner but its overall trade balance with the rest of the world. Furthermore, the cause of a country’s trade deficit lies at home. A trade deficit is the result of a country consuming more than it produces, and it is neither caused nor cured by trade restrictions.
That last sentence of Lee’s really nails Trump’s embarrassingly shabby command of economics (the boldface is ours). A country like the US consumes most of what it produces. The extra stuff it makes, it exports; the extra stuff it wants, it buys from abroad. So when it runs a trade deficit—that is, imports more than it exports—that country is, by definition, producing less than it’s consuming.
Policies that cause a country to produce more than it consumes will, therefore, also alter the trade deficit. Protectionist measures that make imports more expensive, however, will not address the fundamental issue. This is why Trump’s trade barriers—to say nothing of a trade war—are doomed to failure, as we’ve explored before. And, as Nobel laureate economist Joseph Stiglitz points out, that’s why renegotiating bilateral trade deals won’t shrink the deficit either.
That said, the truth about the US trade deficit is more complicated than Lee’s explanation suggests—as the prime minister almost certainly knows.
Because the US dollar is the preferred currency in which central banks hold their foreign reserves, overseas investors can buy as much in US assets as they please. And that is a huge reason behind the US’s chronic trade deficit.
To understand why, let’s go back to trade balances for a moment. A country pays for its imports with what it earns from the exports it sells. To buy more imports than exports, it must borrow from abroad to pay for those goods. This means the US trade deficit also signals that it’s borrowing from foreigners. On the flip side, when a country runs a trade surplus—as Singapore does—it’s lending to the rest of the world.
Now, borrowing from abroad is not inherently bad. Whether it’s wise depends on what the country spends that borrowed money on. The thing is, the US doesn’t need that extra capital. Because America has no shortage of funds to invest, that excess debt goes to pay for things that don’t sustain long-term growth—consumer goods, for instance.
So why does America keep borrowing more than it should? Because countries that run chronic trade surpluses—again, like Singapore—take the money they could have spent buying US exports or investing in their own economy, and instead swap it into dollars to buy American assets (in particular, government bonds).
This is bad for the US. It makes the dollar artificially expensive and, therefore, US exports less competitive than they should be. That, in turn, forces America to either borrow even more, or accept unemployment in its export-focused sectors (notably, manufacturing).
As for Singapore, Lee’s right that the cause of Singapore’s trade surplus does indeed lie at home: with his own exploitative policies.
The government policy of buying excessive sums of foreign assets is generally called “currency manipulation.” As it happens, Singapore topped the charts of 2017 currency manipulators, according to recent research by economist Joseph Gagnon (though it wasn’t necessarily US assets that Singapore was buying).
Bear in mind, too, that Singapore is tiny. This means its government is plowing a mammoth share of its wealth into other countries’ assets.
As a result, it consistently runs one of the world’s biggest current account surpluses (which is essentially the same thing as a trade surplus), in proportion to the size of its economy.
As Gagnon explains, “Singapore’s manipulation derives primarily from its public pension system, which collects high payroll taxes from workers and invests them entirely overseas through a sovereign wealth fund to back future pension obligations.” Were this money instead managed by private investors, it’s unlikely that Singapore would invest such a vast share of savings abroad, he notes.
In other words, the Singapore government effectively takes wages its workers could have spent buying other countries’ goods and instead loans them to foreign consumers to pay for Singaporean exports.
So does Lee have a leg to stand on here? No, not really.
Sure, no one wants a trade war. But if Trump suddenly started emulating Lee’s lead in exporting 41% of its GDP in savings, the loss of American demand would shatter the global economy entirely.