The US Current Account Deficit
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The US Current Account Deficit
The large US current account deficit is attributed to a widening trade imbalance which accounts for 87% of the US deficit. The trade deficit is the result of globalization, consumer spending, and large current account surpluses found in China, oil exporting countries, and Russia totaling a combined surplus of $920B in 2008.
China bought U.S. Treasuries to support the value of the dollar, and keep its exports cheap. It is now the largest lender to the U.S. Government. In November 2010, China owned $895 billion in U.S. Treasuries, 32% of the total $2.8 trillion outstanding. Many are concerned that this gives China political leverage over U.S. fiscal policy, since it could theoretically call in its loan. By buying Treasuries, China helped keep U.S. interest rates low. Until the Subprime Mortgage Crisis, this helped fuel the U.S. housing boom. If China were to stop buying Treasuries, interest rates would rise, delaying any recovery from the recession. This isn't in China's best interests, as U.S. shoppers would buy fewer Chinese exports. However, China is buying fewer Treasuries than in November 2009, when it owned $929 billion. China is diversifying its holdings into other currencies, such as the euro.
The U.S. trade deficit with China means that U.S. companies that can't compete with cheap Chinese goods must either lower their costs or go out of business. Globalization of production resulting from low labor costs in China and other emerging markets have led US firms to move production overseas. Dependence on foreign oil is also a major factor. From 1992-2008, US imports increased 394% from $537B to $2,117B. Whereas, US exports increased by 290%. Increased consumer spending on imports was supported by a housing boom fueled by tax cuts, low interest rates, and rising household debt.
Deficits are not always a negative and can be sustained when there is fiscal responsibility and fair trade balances. Deficits of between 1% and 3% with the occasional surplus worked in the US for nearly 27 years. Deficits that take advantage of global efficiencies create wealth and allow US consumers to maximize their purchasing power. Fiscal responsibility is also required to maintain US credit worthiness. Global trade also needs to be more balanced to have a sustainable deficit. This is echoed by Morgan Stanley Chief Economist Stephen Roach who stated, “other countries must learn to grow the old fashioned way – drawing support from their home markets rather than free-riding on the US”.
The US has run a current account deficit for over 30 years. This shows that deficits can be sustainable over time. However, as of 2005 and earlier, the US deficit has spiked to dangerous and unsustainable levels. As of 2008, the current account
deficit was 5% of GDP having declined from a peak of 6% in 2006. Irresponsible fiscal and monetary policies led to a financial crisis, declining tax revenue, and growing trade deficits. The US deficit is not sustainable and without reductions, the global economy risks another financial crisis.
The US can reduce the deficit by using some measures in both the short- and long-term. In the short-term, the US government can raise taxes to solve the problem of the federal deficit. Meanwhile, because one of the reasons for the current account deficit is the US's greater imports than exports, the US can import more goods that it used to import to improve the current situation. In the longer-term, the US stands to benefit by becoming more self-sufficient and decreasing imports so that it can better support its home markets and domestic industries. Therefore, this industrialized way will bring great benefits to the US.
In general, the global adjustment of external imbalances is likely to occur. According to the economic situation today, the economic hub tends to be moving more towards emerging Asian countries because of their greater number of exports of the combination of traditional and modern goods for people’s daily lives as well as some of
their booming economies. Therefore, to make a smooth adjustment, the Asian countries should keep doing their current works in order to avoid the big economic changes such as trigger inflation, higher interest rates, and recession. Whether imbalances continue depends upon, among many others things, three primary issues. Will US private savings rates increase? As fiscal stimulus is withdrawn, will US public savings increase? And will Asian exporters be able to stimulate domestic demand.
However, the future remains uncertain. If the US can not reign in government spending, then the deficit will continue to rise. While some form of yuan appreciation may be part of the solution, a sharp appreciation as called for by some politicians is unlikely to be effective because it risks increasing the cost of US imports and increasing the US deficit.
The large US current account deficit is attributed to a widening trade imbalance which accounts for 87% of the US deficit. The trade deficit is the result of globalization, consumer spending, and large current account surpluses found in China, oil exporting countries, and Russia totaling a combined surplus of $920B in 2008.
China bought U.S. Treasuries to support the value of the dollar, and keep its exports cheap. It is now the largest lender to the U.S. Government. In November 2010, China owned $895 billion in U.S. Treasuries, 32% of the total $2.8 trillion outstanding. Many are concerned that this gives China political leverage over U.S. fiscal policy, since it could theoretically call in its loan. By buying Treasuries, China helped keep U.S. interest rates low. Until the Subprime Mortgage Crisis, this helped fuel the U.S. housing boom. If China were to stop buying Treasuries, interest rates would rise, delaying any recovery from the recession. This isn't in China's best interests, as U.S. shoppers would buy fewer Chinese exports. However, China is buying fewer Treasuries than in November 2009, when it owned $929 billion. China is diversifying its holdings into other currencies, such as the euro.
The U.S. trade deficit with China means that U.S. companies that can't compete with cheap Chinese goods must either lower their costs or go out of business. Globalization of production resulting from low labor costs in China and other emerging markets have led US firms to move production overseas. Dependence on foreign oil is also a major factor. From 1992-2008, US imports increased 394% from $537B to $2,117B. Whereas, US exports increased by 290%. Increased consumer spending on imports was supported by a housing boom fueled by tax cuts, low interest rates, and rising household debt.
Deficits are not always a negative and can be sustained when there is fiscal responsibility and fair trade balances. Deficits of between 1% and 3% with the occasional surplus worked in the US for nearly 27 years. Deficits that take advantage of global efficiencies create wealth and allow US consumers to maximize their purchasing power. Fiscal responsibility is also required to maintain US credit worthiness. Global trade also needs to be more balanced to have a sustainable deficit. This is echoed by Morgan Stanley Chief Economist Stephen Roach who stated, “other countries must learn to grow the old fashioned way – drawing support from their home markets rather than free-riding on the US”.
The US has run a current account deficit for over 30 years. This shows that deficits can be sustainable over time. However, as of 2005 and earlier, the US deficit has spiked to dangerous and unsustainable levels. As of 2008, the current account
deficit was 5% of GDP having declined from a peak of 6% in 2006. Irresponsible fiscal and monetary policies led to a financial crisis, declining tax revenue, and growing trade deficits. The US deficit is not sustainable and without reductions, the global economy risks another financial crisis.
The US can reduce the deficit by using some measures in both the short- and long-term. In the short-term, the US government can raise taxes to solve the problem of the federal deficit. Meanwhile, because one of the reasons for the current account deficit is the US's greater imports than exports, the US can import more goods that it used to import to improve the current situation. In the longer-term, the US stands to benefit by becoming more self-sufficient and decreasing imports so that it can better support its home markets and domestic industries. Therefore, this industrialized way will bring great benefits to the US.
In general, the global adjustment of external imbalances is likely to occur. According to the economic situation today, the economic hub tends to be moving more towards emerging Asian countries because of their greater number of exports of the combination of traditional and modern goods for people’s daily lives as well as some of
their booming economies. Therefore, to make a smooth adjustment, the Asian countries should keep doing their current works in order to avoid the big economic changes such as trigger inflation, higher interest rates, and recession. Whether imbalances continue depends upon, among many others things, three primary issues. Will US private savings rates increase? As fiscal stimulus is withdrawn, will US public savings increase? And will Asian exporters be able to stimulate domestic demand.
However, the future remains uncertain. If the US can not reign in government spending, then the deficit will continue to rise. While some form of yuan appreciation may be part of the solution, a sharp appreciation as called for by some politicians is unlikely to be effective because it risks increasing the cost of US imports and increasing the US deficit.
