Trade deficits are often pointed to as a sign that there is a “savings shortfall” or “savings imbalance” within a nation (see, for example, this article). This description, as Scott Sumner reminds us, is an implication of the GDP accounting model. In this lens, there is no objection to classifying as trade deficit as a savings imbalance. But does it make economic sense to view it in such way?
Let’s go back to a main question of economics: why do people trade? Specialization of labor allows people to focus on the things they are comparatively better at and trade with others to get the rest of their needs. In other words, people trade because their time is best spent doing what they are best at.
As David Ricardo showed us, when people specialize, they increase production; that is to say, new consumption opportunities emerge when people specialize and trade. At no point is this development considered a “production imbalance.” So, why then is the identical situation considered a savings imbalance when viewed at a macroeconomic level? Other than the mathematical wrangling of the GDP accounting formula, I have no good explanation. As people specalize and trade, new opportunities, both for consumption and investment emerge, which indicates a new balance developing. The economy has gotten larger; there is no imbalance.