Editor's note: Anthony William Donald Anastasi, a special commentator on current affairs for CGTN, is an American Ph.D. candidate at the School of Politics and International Relations at East China Normal University. The article reflects the author's opinions and not necessarily the views of CGTN.

The United States' large trade deficit has been a cause for concern for many onlookers. Yet the debate about what is causing it and how to correct it misses the forest for the trees. While pundits and politicians often attribute trade imbalances to a nation's competitiveness or technological prowess, the uncomfortable truth is that the trade balance of a country is fundamentally shaped by the distribution of income within its borders.

This means that trade surpluses are not the result of superior trade practices or technology but are instead a product of weak domestic demand relative to domestic production. Trade surpluses are built on workers in a country being paid less than their productivity would otherwise suggest. In theory, if income were to be sufficiently distributed in a given country, where the workers could consume all that they produce, then that country's exports would match its imports. This is because, in the global trading system, exports must equal imports. Everything sold needs a buyer.

Countries that run trade surpluses have a savings rate that exceeds domestic investment. How are these large savings rates sustained? Some explanations rest on the idea that countries with higher savings rates relative to domestic demand are culturally thrifty or attribute the reason to other immeasurable factors. Yet this reasoning fails to account for the unbalanced distribution of income in surplus countries. The way surplus countries achieve and sustain such large savings rates is by redistributing income away from the people in the economy who would consume most of their income to those who would save a larger portion of their income.

To conceptualize how this distribution works, we can think of four buckets within an economy that can retain income generated from GDP: average households, very wealthy households, private businesses, and governments. Average households consume most of their income and save only a small portion, while the other three save most of their income and consume little to none of it. To achieve high savings rates, income must be redirected away from average households to elites (the wealthy, businesses, and governments). This can happen in several ways: through taxes on average households, devaluation of the exchange rate, disempowerment of labor unions and workers, or even weak environmental regulations.

In short, economically unequal countries should have savings rates that exceed domestic investment, resulting in a trade surplus. The United States currently faces infamous levels of economic inequality, with labor productivity far exceeding wages since the 1980s. However, the United States also runs large trade deficits. Why does this trend not apply to the United States? The simple answer is dollar hegemony.

The U.S. dollar (USD) serves as the world reserve currency and the currency used for most international trade, two interconnected yet distinct roles. Due to these roles, the USD is, for the most part, readily available for foreigners to use, accumulate, and purchase assets with. This open financial system attracts savings from around the world, particularly from countries with savings rates higher than investment rates, into the United States. This phenomenon strengthens the value of the USD (making exports more expensive and imports cheaper, thus increasing the purchasing power of Americans) while simultaneously infusing the U.S. financial system with capital. This capital influx reduces borrowing costs for Americans and American institutions, both private and public.

Consequently, the United States can finance the gap between domestic demand and domestic production through debt. If the United States were to ease borrowing and bring down domestic demand in line with domestic production (matching imports with exports), this would lead to higher unemployment, a trade-off most political leaders are unwilling to make.

So, how should the United States attempt to narrow its trade deficit? Redistributing income from elites in the United States to average households would yield positive effects, such as reducing debt burdens and alleviating political tensions. However, it would also likely result in higher trade deficits as exports become less competitive, and domestic demand would grow. The only way would be to stop accepting the world's excess savings, as surplus countries' savings must go somewhere, and more times than not, they go to the United States.

Stopping inflows of capital into the United States would, in effect, end the dollar's hegemony, and might force rebalancing in surplus countries, as Germany, Japan, China, and oil-producing states would have to decrease their savings rates relative to domestic demand, as these excess savings would have trouble finding worthwhile investment opportunities abroad. Despite ending dollar hegemony, this would result in some enormous, great effects for the United States. The USD's value would weaken relative to other currencies allowing for United States exports to become more competitive. It would allow the United States to start to rebalance domestic incomes in which workers' wages become more in line with labor productivity, and would ease the United States' debt burden.

Yet the forces in favor of maintaining dollar hegemony are not built on economic considerations, but geopolitical. Dollar hegemony allows Washington to deal great damage to states all around the world, and at times, to little or no cost to the United States. In the case of Iran, United States sanctions brought the Iranian economy to its knees due to Iran's nuclear program. Russia was essentially made an isolated state due to its conflict with Ukraine, though the jury is still out on how much damage these sanctions will actually inflict.

Yet in 2003, when the United States ignored the United Nations Security Council, and invaded Iraq on trumped-up charges of possessing "weapons of mass destruction," the United States faced no such sanctions. The states that were opposed to the United States' invasion into Iraq, barring military action in support of Iraq, were left with few tools to punish the United States for breaking the "rules-based international order," thanks to the international status of the USD.

In essence, dismantling the dollar's global reserve currency status and its dominant role in international trade would usher in a new era, where the nation's trade balance would find equilibrium, and the scales of domestic income distribution could be reset.

However, the prevailing sentiment among the United States' political leadership suggests a reluctance to embark on this transformative path. As a result, the United States' balance of trade and domestic economic performance, namely in manufacturing, will continue to suffer, in favor of maintaining dollar hegemony and Washington's ability to sanction and punish states at will. As a result, the nation is left with its towering trade deficit, alarming economic disparities, and an ever-increasing debt burden, all set to remain entrenched in the status quo.

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