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Persistent U.S. trade deficits, in my view, have three main causes:
1) Overconsumption by U.S. consumers, or in other words, a very low rate of savings, promoted by historically low interest rates.
2) A widespread shift by sellers of goods and services in the U.S. to offshore manufacturers or manufacturing sites to take advantage of cheap labor costs.
3) For many kinds of goods, such as televisions or compact, energy-efficient vehicles, U.S. manufacturers have virtually ceded the market to foreign competitors. As a result, it is impossible to find certain kinds of goods, such as televisions, that are not imported. This has created what might be called a "structural" trade deficit.
Exchange rates have not responded to persistent trade deficits over the past three decades for two main reasons:
1) Since the collapse of the Bretton Woods system in 1971, the U.S. dollar has been the de facto reserve currency of the world. As the world's largest economy, it plays a dominant economic role globally. Its economic growth has been more consistent than that of other developed countries. Because of its size and perceived stable growth, U.S. bonds and securities have attracted far more foreign investment than there has been U.S. investment abroad. As a consequence, there has been steady investor demand for dollars, sometimes exceeding the supply of dollars remitted for imports at a given price point, so that the dollar can rise even as a trade deficit persists or increases.
2) It is widely known that the Chinese and Japanese central banks have been supporting the dollar for several years with massive purchases of U.S. assets, particularly Treasury bills. This allows them to recycle dollars gained through exports to the United States, without converting the dollars into their local currencies. This keeps their currencies weak and U.S. demand for their exports steady. It also means that the U.S. trade deficit is coming at the expense of a growing and massive debt to two of our main trade partners. We are basically buying from them on credit. Whenever they "demand payment" by selling their dollar holdings, the dollar will likely plummet.
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