Does the United States really want to eliminate the trade deficit? Deutsche Bank says, it's simple, just devalue the dollar by 40%.

According to the Wind Chase Trading Platform, Deutsche Bank economist Peter Hooper proposed a seemingly "simple" solution to eliminate the US trade deficit in his latest research report - a 40% depreciation of the US dollar. The report points out that fluctuations in the real exchange rate of the US dollar are the most sustained driving factor behind the US trade deficit, and reversing the 40% real appreciation of the US dollar over the past 15 years may be enough to bring the trade deficit back to zero balance. However, a significant depreciation of the US dollar would have a severe impact on global markets and emerging markets and export-oriented economies would suffer serious blows, leading to a global economic recession. Hooper believes that although existing tariff policies help narrow the deficit, they come with the painful cost of price increases and slowed growth. Therefore, the US government may shift its trade policy focus away from tariffs in the future. Key driving factors of the US trade deficit The Deutsche Bank report identified the key factors driving the US trade deficit to its current level. The report points out that fluctuations in the real exchange rate of the US dollar are the most sustained driving factor behind the US trade deficit, primarily driven by fundamental shifts in fiscal and monetary policy and changes in overseas private and government savings. The report specifically mentioned that the US deficit with the rest of the world has reached unprecedented levels. Since Trump took office, he has introduced the largest tariff policy since the Great Depression to address this issue. The "solution" of a 40% depreciation of the US dollar The key finding of Deutsche Bank is that the US dollar's real exchange rate has appreciated by approximately 40% relative to a basket of currencies over the past 15 years. If this appreciation can be reversed, it may be enough to bring the US trade deficit back to zero balance or a better level. Charts in the report show that a depreciation of the US dollar by 20-30% could eventually reduce the deficit by approximately 3% of GDP. This means that if the US dollar can significantly reverse its approximately 40% real appreciation since 2010, it may bring the current deficit back to zero balance. Potential impact on the global economy The report warns that a 40% significant depreciation of the US dollar would have disastrous implications for the global economy. As most emerging market economies and much of Europe rely on export-driven growth, a 40% drop in the US dollar would translate to a 40% appreciation in other currencies, potentially leading to a global economic downturn. Deutsche Bank believes that although there are more effective and less painful alternative paths to address the trade deficit, the preferred approach may not be politically feasible at the moment. However, the report expects that as the negative economic effects of current tariff-focused policies become more apparent in the coming months, public pressure will drive a policy shift. Possibility of a reversal in tariff policy Deutsche Bank acknowledges that current tariffs can indeed narrow the trade deficit to some extent. This is because of two reasons: Foreign retaliation against the US's aggressive tariff policy may be more hesitant and mild than in the past Trump's tariffs have led to a depreciation of the US dollar, rather than the usual appreciation that accompanies tariffs However, the report emphasizes that tariff policies come with significant costs in terms of price increases and reduced output, with these negative effects expected to become evident in the coming months and potentially lasting for several years. The report notes that while reducing the deficit is not a painless process, a depreciation of the US dollar may be a more effective and less painful path. This preferred path may not be politically feasible at the moment, but as the negative economic effects of current tariff-focused policies become more evident in the coming months, public demand to reverse this policy is increasing. This article is translated from Wall Street Globe and is written by Pan Lingfei, GMTEight Editor: Li Cheng