President Donald Trump is right about one thing: The United States trade deficit with the rest of the world - which topped US$500 billion (S$708.6 billion) last year - is unhealthy.

It puts upward pressure on US unemployment that can only be countered with policies that lead to rising debt.

It doesn't follow, however, that the worst culprits are always the countries that run the biggest trade imbalances with the US. Global trade is complex and trade imbalances between two countries may be the result of imbalances generated by policies elsewhere. Interventions that target specific nations can actually make the overall US trade deficit worse.

Mexico is a case in point. The country is America's third-largest trading partner, with US$525 billion in annual trade between them. It exports goods to the US worth nearly US$63 billion more than it imports. Only three other countries run larger surpluses with the US, making Mexico an obvious target for the Trump administration.

The headline number, however, does not tell the full story. Despite its surplus with the US, Mexico has the world's seventh-largest current account deficit overall, equal to 2.8 per cent of its gross domestic product; trade accounts for half of the deficit. Countries with current account deficits invest more than they save and must fund the difference with foreign capital.

Mexico is thus a net importer of capital.

Compare this with China's US$347 billion bilateral surplus with the US, Japan's US$69 billion and Germany's US$65 billion. All three trade surpluses are only part of the larger surpluses each country runs with the whole world. Countries with trade surpluses, of course, must export the excess savings that they are unable to invest domestically, making these three also the world's three largest net exporters of capital, at US$293 billion, US$138 billion and US$285 billion, respectively.

Their high savings rates reflect low consumption levels in each country as a share of GDP. Consumption is weak , in turn, because ordinary households retain disproportionately low GDP shares relative to the government, businesses and the wealthy.

Because their own consumers can't absorb all that these nations produce, they must export their excess production along with their excess savings into a world reluctant to take either.

Countries can limit their vulnerability to these excesses by directly or indirectly restricting capital inflows. But the US, with its deep and flexible financial markets, imposes no capital barriers, making it the automatic shock absorber for the world's excess savings. Nearly half of the world's net capital exports flow into the US. The only way to accommodate all this money is by running persistent trade deficits.

Most economists misunderstand the relationship between trade and capital flows, perhaps because for most of history it was simpler.

In the past, trade between two countries mainly reflected differences in production costs; capital flowed between them to balance imports and exports. In other words, trade determined the direction of net capital flows.

That is no longer the case. Capital flows have grown many times larger than trade flows, with merchandise trade accounting for just over 1 per cent of daily foreign-exchange trading volume, according to the United Nations Conference on Trade and Development. Independent investment decisions now force trade to adjust, shifting the relative prices of traded goods by altering interest rates or exchange rates.

Unlike China, Japan or Germany, Mexico doesn't export capital or run trade surpluses with the rest of the world. Instead, it absorbs excess global savings and manufactured products, just as the US does. Mexico's large bilateral trade surplus with its northern neighbour is mainly a consequence of the logistical convenience of a shared border and streamlined regulations. Japan, for instance, might directly export excess savings to the US and indirectly export excess production in the form of intermediate goods shipped to several countries in the value chain, including Mexico, which in turn run trade surpluses with the US.

If the Trump administration were to penalise Mexican imports, US trade deficits with Mexico would almost certainly shrink. But the deficits the US runs with other countries would expand. Why? Because US intervention would make Mexico less attractive to foreign capital. Instead, that capital would end up in the US - and the problem would intensify if other Latin American countries suffered contagion effects from Mexico. Higher net inflows into the US would inexorably force accommodating price adjustments that raise the total US trade deficit by equivalent amounts, even as the deficit with Mexico recedes.

Mexico's trade surplus with the US is a red herring. Its large trade deficit with the rest of the world reduces global imbalances and, so, helps moderate the US deficit. While the global trading system clearly needs fixing, punishing Mexican exporters would do little to address the fundamental problem of excess savings in certain countries. Worst of all, it would only make US trade even more unbalanced.

BLOOMBERG VIEW

• The writer is a professor of finance at the Guanghua School of Management at Peking University in Beijing, China.