<p>It all boils down to the macroeconomic identity</p>

<p><span class="math-container">$$ (G -T) \equiv (S – I) +(M-X), $$</span></p>

<p>where <span class="math-container">$X$</span> stands for exports, <span class="math-container">$M$</span> for imports, <span class="math-container">$G$</span> is government spending, <span class="math-container">$T$</span> are taxes, <span class="math-container">$S$</span> private savings and <span class="math-container">$I$</span> private investment.</p>

<p>Given <span class="math-container">$S-I$</span>, the larger is the budget déficit, the larger the trade deficit is. <span class="math-container">$S-I$</span> can be thought of as the private sector excess financing ability. With this amount, it needs to finance both the budget deficit and pay for the difference between what it is able to sell abroad and what it buys abroad. If, as in the US, <span class="math-container">$S-I$</span> is not too large (due to low <span class="math-container">$S$</span>), as soon as the government incurs in a budget deficit, a trade deficit will appear.</p>

<p>This does not tell us with which specific country the trade deficit will happen. However, it does tell us that those countries with high <span class="math-container">$S-I$</span> and low budget deficits (or even surpluses) need to be running trade surpluses, and this is the case of China (or Germany).</p>

CC BY-SA 4.0
2019-01-05T11:14:02.897Z
Please, consider reading [The Identity-Equals-Causation Fallacy, Yet Again](http://econospeak.blogspot.com/2016/12/the-identity-equals-causation-fallacy.html?m=1).
keepAlive
CC BY-SA 4.0
2019-01-03T05:25:19.240Z
2019-01-04T11:33:04.430Z
2019-01-04T11:33:04.430Z
Patricio
<p>If what you have in mind via your question is the well-known macroeconomic identity <span class="math-container">$C + S + T ≡ Y ≡ C + I + G + X$</span>, read <a href="http://econospeak.blogspot.com/2016/12/the-identity-equals-causation-fallacy.html?m=1" rel="nofollow noreferrer">The Identity-Equals-Causation Fallacy, Yet Again</a>. Below, an extract that addresses your <strong><em>How</em></strong>:</p>

<blockquote>
  <p>There is no causation at work here. Net exports does not cause net borrowing (budget deficit), nor is it the other way around; they are identical to one another, different ways of recording the same economic events.</p>
</blockquote>

<p><hr>
In conclusion, while addressing your US-<em>vs</em>-China concern: the accounting-like shortcut that consists of saying that USA debt to China is actually used to import goods from China is not the factual reality, <em>only an accounting one</em>.</p>

<blockquote>
  <p><strong><em>How</em></strong> does a budget deficit help grow a trade deficit?</p>
</blockquote>

<p>The causality has to be considered in the opposite direction. The real (and simplified) story behind is that, when importing/buying goods from another country, a U.S. private company is not doing so from a local one who would pays taxes and thus generates tax revenues for the U.S. government, which would in turn allow the latter to contract less debt when e.g. ensuring the continuity of its social system.</p>

CC BY-SA 4.0
2019-01-04T11:38:06.840Z
As this is an identity, the direction of causality is not obvious. _Ceteris paribus_, greater trade deficits will mean greater budget deficits, but greater budget deficits will also imply greater trade deficits.
Patricio
CC BY-SA 4.0
2019-01-04T11:52:13.420Z
@Pat. I am not using this oversimplified national-account identity in my reflection, but my experience and understanding as an economist. How would you archetype/explain in real-life terms what you describe with this macro-identity?
keepAlive
CC BY-SA 4.0
2019-01-05T07:11:54.550Z
There is nothing _oversimplified_ about identities. Identities are what they are, that's why they're identities. Also, recall this is a decentralized economy, so every agent is taking its own decisions. _Ceteris paribus_ if government spending increases, where will the goods it buys come from? it will have to come from abroad, and, thus, the trade deficit will grow.
Patricio
CC BY-SA 4.0
2019-01-05T10:21:09.803Z
@Pat *This is an oversimplification, since it leaves out transfers, asset incomes and currency flows.  The main adjustment would be to add transfer payments and net asset income to the current account.  A further adjustment would need to be made for changes in holdings of currency, the reserve account...*
keepAlive
CC BY-SA 4.0
2019-01-05T10:28:20.550Z
@Pat. Read [this](http://econospeak.blogspot.com/2016/12/the-identity-equals-causation-fallacy.html?m=1) and let's have a tchat if you want. Cheers.
keepAlive
CC BY-SA 4.0
2019-10-17T11:34:56.763Z
Any question @JJJJ ?
keepAlive
CC BY-SA 4.0
2019-01-04T01:24:21.837Z
2019-01-06T19:00:27.440Z
2019-01-06T19:00:27.440Z
keepAlive
<p>What are the mechanism that explains this, and does this help explain the U.S.-China trade deficits?</p>

<international-trade>
How does a budget deficit help grow a trade deficit?
JJJJ
# How does a budget deficit help grow a trade deficit?

(Asked by: username_0 on 2019-01-03)

What are the mechanism that explains this, and does this help explain the U.S.-China trade deficits?

**Tags:** international-trade


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## 2 answers

### Answer by username_1 on 2019-01-03. Score: 1

It all boils down to the macroeconomic identity

$$ (G -T) \equiv (S – I) +(M-X), $$

where $X$ stands for exports, $M$ for imports, $G$ is government spending, $T$ are taxes, $S$ private savings and $I$ private investment.

Given $S-I$, the larger is the budget déficit, the larger the trade deficit is. $S-I$ can be thought of as the private sector excess financing ability. With this amount, it needs to finance both the budget deficit and pay for the difference between what it is able to sell abroad and what it buys abroad. If, as in the US, $S-I$ is not too large (due to low $S$), as soon as the government incurs in a budget deficit, a trade deficit will appear.

This does not tell us with which specific country the trade deficit will happen. However, it does tell us that those countries with high $S-I$ and low budget deficits (or even surpluses) need to be running trade surpluses, and this is the case of China (or Germany).

> **Comments:**
> **username_2**: Please, consider reading [The Identity-Equals-Causation Fallacy, Yet Again](http://econospeak.blogspot.com/2016/12/the-identity-equals-causation-fallacy.html?m=1).  

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### Answer by username_2 on 2019-01-04. Score: 0

If what you have in mind via your question is the well-known macroeconomic identity $C + S + T ≡ Y ≡ C + I + G + X$, read [The Identity-Equals-Causation Fallacy, Yet Again](http://econospeak.blogspot.com/2016/12/the-identity-equals-causation-fallacy.html?m=1). Below, an extract that addresses your ***How***:

> There is no causation at work here. Net exports does not cause net borrowing (budget deficit), nor is it the other way around; they are identical to one another, different ways of recording the same economic events.

---

In conclusion, while addressing your US-*vs*-China concern: the accounting-like shortcut that consists of saying that USA debt to China is actually used to import goods from China is not the factual reality, *only an accounting one*.

> ***How*** does a budget deficit help grow a trade deficit?

The causality has to be considered in the opposite direction. The real (and simplified) story behind is that, when importing/buying goods from another country, a U.S. private company is not doing so from a local one who would pays taxes and thus generates tax revenues for the U.S. government, which would in turn allow the latter to contract less debt when e.g. ensuring the continuity of its social system.

> **Comments:**
> **username_1**: As this is an identity, the direction of causality is not obvious. _Ceteris paribus_, greater trade deficits will mean greater budget deficits, but greater budget deficits will also imply greater trade deficits.  
> **username_2**: @Pat. I am not using this oversimplified national-account identity in my reflection, but my experience and understanding as an economist. How would you archetype/explain in real-life terms what you describe with this macro-identity?  
> **username_1**: There is nothing _oversimplified_ about identities. Identities are what they are, that's why they're identities. Also, recall this is a decentralized economy, so every agent is taking its own decisions. _Ceteris paribus_ if government spending increases, where will the goods it buys come from? it will have to come from abroad, and, thus, the trade deficit will grow.  
> **username_2**: @Pat *This is an oversimplification, since it leaves out transfers, asset incomes and currency flows.  The main adjustment would be to add transfer payments and net asset income to the current account.  A further adjustment would need to be made for changes in holdings of currency, the reserve account...*  
> **username_2**: @Pat. Read [this](http://econospeak.blogspot.com/2016/12/the-identity-equals-causation-fallacy.html?m=1) and let's have a tchat if you want. Cheers.  
> **username_2**: Any question @username_0 ?  

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