It has been suggested that the main cause of the U.S. trade deficit with China is the savings gap between the two countries, involving some combination of China saving too much and the U.S. saving too little. From Morgan Stanley Asia Chairman Stephen Roach:
Morgan Stanley Asia Chairman Stephen Roach said that Paul Krugman’s call to push China to allow a stronger yuan is “very bad” advice and that increased Chinese spending is a better way of reducing trade imbalances.
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“We’re lashing out at China rather than tending to our own business,” which is raising U.S. savings, Roach said.
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The U.S. trade deficit is due to a shortfall of savings, and any attempt to address the bilateral gap with China would just cause a shift to another country as Americans kept up their spending, according to Roach. ...
“What the world needs is a shift in the mix of saving,” Roach said in a further e-mail. While China has a “major surplus saving imbalance,” it’s “highly debatable” whether it’s because of the yuan stance. Efforts to boost Chinese consumer spending will be a more effective way to address the issue, he said
See also this old (2006) piece from the Economist:
The main reason why neither a revaluation of the yuan nor trade restrictions will slash America's external deficit is that the real cause of that deficit is that the country consumes too much and saves too little. A change in the yuan's exchange rate will not by itself alter this fact. Indeed, from this point of view, China's exchange-rate policy has arguably helped America in recent years, rather than hurting it.
In reaction to this, here are some quick thoughts on the issue of savings and the trade deficit.
In all likelihood, there is something to the argument about the impact of the "savings gap." If the U.S. saved more, and China consumed more, the trade deficit would almost certainly go down. But does this mean that the savings gap is a more important issue for U.S.-China trade issues than the exchange rate?
I prefer to focus on the exchange rate rather than differential savings, for the following reasons. First, there are aspects of the savings rate that are mostly outside of government control. For example, people in different countries have different attitudes about long-term and short-term spending, and these various attitudes are, in my view, equally valid. It is simply different preferences about when and how to spend money. Buy a new car now, or save the money to live better during retirement or pass along to future generations? Both are perfectly fine choices. While government can influence these choices, I'm not sure it can do all that much to change the underlying attitudes. And even if it could, should it? It seems to me that Americans (myself included) spend too much on things we don't really need. But that's just my view of things, and I don't want to impose that view, or any other view, on others. Let each individual/country decide how much to spend/save. Yes, there are trade implications from these different attitudes, but there are also non-trade implications from trying to change people's consumption/savings preferences.
Second, regardless of the existence of a savings gap, exchange rates can be manipulated in a manner that is protectionist (e.g., favoring domestic companies at the expense of foreign ones). So even if the savings gap were to narrow or disappear, the trade friction is likely to continue to some degree as long as there is a currency peg, although it could be less of a concern.
Third, I'm not all that concerned about a trade deficit or surplus with particular countries. I'm more concerned with protectionist measures. With regard to the deficit/surplus, in the long run, it should probably be the case that a country's overall current account is not too far out of balance. But I would prefer to let floating (at least partially, anway) exchange rates achieve this, rather than trying to influence people's spending/saving patterns.
As I said, those were some quick thoughts, which may have strayed far enough from the law to lose the interest of many of this blog's readers, so I'll wait and see if anyone wants to discuss this before going into any more detail.
