The usual suggestion to lower trade deficit is increase exports and lower imports and also depreciation of the currency.
Luciana Juvenal, Economist at St Louis Fed in this short research note says:
What other forces could drive the trade balance? As the chart shows, pronounced cycles and booms in asset prices have usually accompanied widening trade deficits. For example, U.S. equity prices rose by almost 340 percent between 1990 and 2000 before losing about one-third of their value in the first two years after the dot-com crash. Similarly, housing prices increased by around 130 percent between 1990 and 2007 with a marked increase from the early 2000s until 2007. Moreover, after the subprime crisis that began in the summer of 2007, sharply declining asset prices have brought about an improved trade balance.
What links exist between asset prices and the trade balance? Rising asset prices are presumably linked to trade deficits because they increase household wealth and spending, they can finance it by issuing equity. Conversely, weakening asset prices might be associated with lower spending, and hence, lower demand for imports.
Very interesting finding. I didn’t think of this channel before. So what are the suggestions?
In conclusion, a large U.S. dollar depreciation could be a key driver of the trade balance adjustment, but recent analysis has questioned its effectiveness. Given the strong links between equity and housing prices and the trade balance, moderating U.S. asset prices could serve as an alternative mechanism to sizably adjust the trade deficit.
Hmmm. Her detailed paper on these findings is here.