The U.S. Really Does Have a Balance-of-Payments Problem
The establishment case against tariffs got a polished restatement in the Financial Times this week. It is worth examining carefully because it gets the problem wrong, gets the causation wrong, and offers wishes in place of solutions.
Harvard economist and former IMF chief economist Gita Gopinath argues that there is no real balance-of-payments emergency, that the deterioration in America’s net international investment position is largely a valuation story rather than a genuine external crisis, and that the real answers lie in fiscal consolidation in Washington and consumption-led rebalancing in Beijing. Tariffs, she warns, may create the very crisis they are supposed to prevent.
That may sound academic, but it has immediate real-world implications. The administration’s new tariffs—drafted after the Supreme Court struck down last year’s duties—rest on a 1970s statute that gives the president authority to impose tariffs specifically to address fundamental imbalances in international payments. Opponents are already preparing to argue that the president lacks that authority because the supposed problem does not exist.
Let’s grant that there is something to her first point. Markets still treat the United States as a safe haven. The dollar’s strength during the outbreak of war in Iran is evidence of that. But this lets her refute a panic story the administration does not need. The Trump administration’s case for the new balance-of-payment tariffs does not rise or fall on whether the United States is about to turn into Argentina. It is enough to see that the present system is badly out of balance: our demand flows outward, production follows it, and foreign ownership claims on American assets accumulate. A payments problem does not have to mean we cannot meet our obligations tomorrow morning. It can mean we are steadily trading away productive strength.
Her treatment of the net international investment position (NIIP) makes the same narrowing move in technical language. America’s NIIP—the difference between what Americans own abroad and what foreigners own here—has deteriorated sharply, from roughly negative 50 percent of GDP in 2015 to negative 89 percent in 2024. Gopinath argues that much of this reflects the superior performance of U.S. equities relative to foreign equities, which raises the market value of foreign-held claims on American companies.
Even if that is true, it does not prove what she thinks it proves. Valuation effects may explain much of the worsening in the stock of net liabilities. They do not erase the flow problem. The United States still runs large trade deficits and large current-account deficits. Foreign claims on American wealth do not become less real just because they grew more valuable as U.S. markets outperformed. If anything, her own analysis points to a different vulnerability: a country whose external position depends increasingly on foreigners’ willingness to hold massive and growing claims on its equity market has not escaped dependence. It has merely changed its form.
The Trade Deficit Causes the Budget Deficit
Her proposed remedies are weaker still.
The first is fiscal consolidation in Washington. “Fiscal consolidation” is code for balancing the budget. Your first reaction is the same as ours: what planet has Gopinath been living on? There’s no possibility that Congress would approve a balanced budget anytime soon. The massive tax increases or massive budget cuts required would be so unpopular that even if one party or the other managed to enact them, they’d immediately lose control in the next election. People may say they like balanced budgets, but few are willing to foot the bill or support politicians who would.
And there’s actually a good reason for this: our trade deficit all but requires a budget deficit. In an economy with a roughly balanced trade position, everyone in America is spending someone else in America’s income. But when we run a trade deficit, a portion of our national spending doesn’t become national income. It leaks out to become foreign income. If that leakage is left to its own, it means that Americans must accept declining incomes and shrinking wealth. To avoid becoming poorer, we need someone to fill the gap. As long as foreigners refuse to fill the gap by buying the products of American labor, the only place to turn to is the government. The budget deficit is how a responsible government responds to the trade deficit.
Gopinath’s program gets this causation backward by assuming that budget deficits drive current-account deficits.
China’s Never Going to Rebalance Its Economy
Her China prescription is even less serious. Gopinath points to Beijing’s rhetoric about “investing in people” as evidence that a consumption-led rebalancing may finally be underway. But the trade data tell the real story. Even when tariffs squeezed Chinese exports to the United States, the response was not to strengthen consumption at home. It was to send the goods somewhere else. Exports diverted from the U.S. showed up in Southeast Asia, Latin America, Africa, and Europe. China isn’t rebalancing anything. It is just finding new channels for the same old surplus.
But even if Beijing wanted a true consumption-led rebalancing, it would run straight into the politics of its own system. China’s surplus depends on channeling income away from households and toward industry, exporters, and the state sector. Household consumption is not depressed by mistake. It is kept down on purpose. The beneficiaries of the Chinese regime are not about the see that reversed.
What Gopinath never seriously engages is why the textbook adjustment never arrives. And yet the United States has lived with current-account deficits for half a century without getting the self-correction the models promise. The dollar remains propped up by reserve demand, safe-haven buying, and the world’s continuing appetite for U.S. assets. That is where the essay goes most wrong: it mistakes the persistence of the arrangement for proof that it is benign.
The payments problem may not be acute in the narrow sense Gopinath prefers. But the alternatives she offers—waiting for Washington to discover fiscal discipline and for Beijing to abandon mercantilism voluntarily—are not solutions. They are fantasies dressed up as analysis.
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