US-China Trade War: Speculative Saving Perspective

Abstract

The persistently remarkable bilateral imbalance of the current account has been argued to have triggered the US-China Trade War. Speculative saving can simultaneously explain both global and domestic imbalances by clarifying why the U.S. undersaves (overconsumes), while China oversaves (underconsumes), when facing a bubble. Speculative saving occurs when households predict a bubble. With(out) borrowing constraints, households over-(under-)save due to the expected net capital gain from the bubble, and the saving rate increases (decreases) with bubble growth but decreases (increases) with interest rates. Oversaving arises in a closed economy due to resource constraints, while undersaving can occur in the U.S. because the U.S. dollar can be financed by other countries, such as China. Hence, restraining the ongoing housing bubbles and increasing the interest rates in both countries, as well as replacing the U.S. dollar with a new world currency, would mitigate the imbalances and thus relax or end the tension arising due to the trade war.