The U.S. Current Account Deficit: Case Analysis
The US Current Account Deficit
Case Analysis 1
The large US current account deficit is attributed to a widening trade imbalance which accounts for 87% of the US deficit (see Exhibit 1). 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 (see Exhibit 2).
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% (see Exhibit 1). 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 (see Exhibit 3). 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” (HBS p11). 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 (see Exhibit 3). Irresponsible fiscal and monetary policies led to a financial crisis, declining tax
Case Analysis 1
The large US current account deficit is attributed to a widening trade imbalance which accounts for 87% of the US deficit (see Exhibit 1). 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 (see Exhibit 2).
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 $2,117B. Whereas, US exports increased by 290% (see Exhibit 1). Increased consumer spending on imports was supported by a housing boom fueled by tax cuts, low interest rates, and rising household debt.
Deficits are not always a negative and can be sustained when there is fiscal responsibility and fair trade balances. Deficits of between 1% and 3% with the occasional surplus worked in the US for nearly 27 years (see Exhibit 3). Deficits that take advantage of global efficiencies create wealth and allow US consumers to maximize their purchasing power. Fiscal responsibility is also required to maintain US credit worthiness. Global trade also needs to be more balanced to have a sustainable deficit. This is echoed by Morgan Stanley Chief Economist Stephen Roach who stated, “other countries must learn to grow the old fashioned way – drawing support from their home markets rather than free-riding on the US” (HBS p11). The US has run a current account deficit for over 30 years. This shows that deficits can be sustainable over time. However, as of 2005 and earlier, the US deficit has spiked to dangerous and unsustainable levels. As of 2008, the current account deficit was 5% of GDP having declined from a peak of 6% in 2006 (see Exhibit 3). Irresponsible fiscal and monetary policies led to a financial crisis, declining tax
References: Alfaro & Tella. (March 11, 2010). Harvard Business School. The US Current Account Deficit HBS CS 9-706-002 p 15. Source: Adapted from BEA, US International Transactions Accounts Data, Sept. 17, 2009. a Unilateral Transfers consisted of US government grants, taxes paid by foreign residents to the US government less taxes paid by US residents to foreign governments, and other payments. Exhibit 2 Global Current Account Balances, 1997-2008 (billions US$) a United States’ figures from BEA, US International Transaction Data, Sept. 17, 2009. Exhibit 3 US Current Account and Real Exchange Rate, 1948–2008