It is not the time to teach basic international macroeconomics to the President of the United States of America. Renowned economist Jeffrey Sachs put it very well in a public speech. He said that high trade deficits, which are bothering President Donald Trump, are not because of trade policies like low tariffs.

The high deficit simply means that Americans like to buy beyond their productive or earning capacity. It is like a consumer going on a buying binge with a credit card. America’s production, earning, investing, saving and buying activities are captured by a basic equation called identity in the macroeconomics textbook. The equation says that the trade deficit is equal to the savings-investment imbalance. In other words, the excess of imports over export earnings of America is just the mirror image of the excess of investment over domestic savings.

This basic equation identity is unaltered by any changes in import tariff rates, any sanctions imposed on Russia or China, or any military spending or aid given to Israel or Ukraine. It reflects consumer behaviour and investor preferences. It is not an expression of business sentiment such as that expressed by the stock market. We may observe that America’s stock market remains at historic highs despite the tariff mayhem unleashed by President Trump.

The above equation identity means that any dollar shortfall needed to pay for the trade deficit is supplied by foreign investment inflows, which is the savings-investment imbalance. But that inflow comes at a cost. If it is as debt capital inflow, it increases the indebtedness of the country. No wonder the........

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