Summary
Current policies use tariffs to reduce persistent trade deficits, but new research shows that encouraging household savings with modest subsidies can achieve rebalancing—while also raising wages, improving global welfare and shrinking inequality.

Global trade and asset imbalances—where some countries consistently borrow while others build up financial surpluses—have long shaped international economic policy. The United States, in particular, has run persistent trade deficits and is now the world’s largest net debtor. Foreign-held debt now exceeds 50% of U.S. GDP, underscoring the scale and urgency of the imbalance. Meanwhile, economies like China, Germany, and Japan have built up large trade surpluses and foreign asset positions.

U.S. policymakers have taken various steps over the years to address the trade deficit. One active approach has been the use of tariffs to reduce trade deficits and shift global trade patterns. There’s another approach that would shrink the trade deficit and raise the standard of living globally. In a new paper published by the European Economic Review, two colleagues and I show the far-reaching effects of incentivizing savings in the U.S. Simple policies such as expanding 401(k) or IRA contribution limits would give people more savings and businesses more capital to invest in new projects, leading to further increases in wages and decreases in America’s need to borrow from abroad.

Methodology and Results

To analyze the effects of U.S. savings incentives, Andrew Glover of the Federal Reserve Bank of Kansas City, Jacek Rothert of the U.S. Naval Academy and I built  a state-of-the-art economic model that reflects key features of the U.S. and global economy. It accounts for America’s large external debt, unequal wealth distribution and the reality that many households face income uncertainty and borrowing constraints. We used this framework to generate a detailed simulation of the economy so we could evaluate outcomes of several policy options.

Our main finding is striking: a small subsidy on savings returns, which slightly increases the financial payoff from saving, would be enough to fully eliminate the U.S.’s net foreign debt and trade deficit in the long run. It would also raise investment and wages, improving economic well-being both domestically and abroad.

Perhaps surprisingly, the savings subsidy also reduces wealth inequality at home. Although high-wealth households benefit more directly through increased capital income, the resulting rise in wages spreads gains broadly across the income distribution. In fact, the study finds that inequality declines in the U.S. under this policy, even when it is funded by lump-sum taxes.

This savings-led approach doesn’t just reduce America’s trade deficits. It also boosts global well-being. As U.S. savings increase, world interest rates go down, and investment rises both at home and abroad. This global rise in capital raises wages in other countries too, especially among poorer households that depend on labor income. The U.S. accounts for just 7% of the world’s population. But in our model, a 5.48% savings subsidy to U.S. households would ultimately raise welfare for 80% of workers worldwide.

Share of Households Benefitting From Rebalancing Approaches	In Debtor Nations	In Creditor Nations
5.48% Savings Subsidy in Debtor Nation	100%	80%
4.97% Tax on Returns in Creditor Nation	19%	79%

One question policymakers often face is how quickly to implement policies that can affect the welfare of their citizens. We find that, in the long run, there’s no significant difference between introducing a savings subsidy all at once or over a 10-year period.

We also explored the effects of a different approach to reducing trade imbalances: reducing savings in creditor nations. Our model shows that disincentivizing saving in creditor countries (via a tax on asset returns) would—on paper—rebalance trade. But it would also shrink global investment and slow growth.

While tariff policies continue to receive attention, this research points to a promising complementary approach: strengthening household balance sheets. Encouraging private savings can help fix global imbalances and generate welfare gains worldwide.

Ayse Dur is an assistant professor of economics. Her research focuses on macroeconomics, macroeconomics and monetary economics, and computational economics.