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With reforms in China, time may correct U.S. current account imbalance

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  • Jian Wang

Abstract

The U.S. current account deficit has deepened significantly since the late 1990s. This shortfall—the value of net exports of goods and services, international financial investment net income and transfer payments—was $803 billion at its peak in 2006, or 6 percent of U.S. gross domestic product (GDP). Conversely, China, Germany, Japan and the oil-exporting countries have been running current account surpluses that have risen substantially (Chart 1). This divergence has raised concerns among policymakers, economic researchers and private investors about whether these imbalances are sustainable and at what risk to the global economy. ; In theory, current account imbalances do not necessarily indicate economic danger. If a country is expected to grow more rapidly in the future, running a current account deficit is an optimal behavior. The country should borrow now from the rest of the world to finance current consumption and repay the money later when it has greater means. For instance, Europe ran a current account deficit while rebuilding after World War II. ; A large share of the U.S. current account deficit before 2005 was with other industrial countries, such as Germany and Japan. This behavior makes economic sense, argue Charles Engel, a University of Wisconsin–Madison economics professor, and John Rogers, a Federal Reserve Board economist.[1] These trade deficits/surpluses simply reflect the difference in growth prospects between the U.S. and other major industrial nations. Since the mid-1970s, economic expansion in the U.S. has outpaced that of other industrial countries. GDP on average grew 2.82 percent in the U.S. between 1975 and 2009, compared with 1.87 percent for Germany and 2.33 percent for Japan. If the U.S. continues to outperform other industrial countries, it is optimal to borrow from these nations now and incur a current account deficit. Assuming that the difference in economic growth between the U.S. and other industrial countries over the past 30 years continues for another 20 years, Engel and Rogers found that a standard economic model could justify a U.S. current account deficit at its 2004 level, the end of the period covered in their research. ; Demographic differences also factor into account imbalances. The populations of several industrial countries, including Germany and Japan, are aging more rapidly than the population of the U.S. The need to support future retirees provides an incentive for these countries to save and incur current account surpluses with the U.S.>

Suggested Citation

  • Jian Wang, 2011. "With reforms in China, time may correct U.S. current account imbalance," Economic Letter, Federal Reserve Bank of Dallas, vol. 6(jan).
  • Handle: RePEc:fip:feddel:y:2011:i:jan:n:v.6no.1
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    Keywords

    Trade ; Imports - Prices;

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