Editor Pick – Businesses and U.S. Current Account Deficit
Diana Farrell and Susan Lund tell businesses what they need to know about the US current-account deficit.
“At $857 billion and growing, the US current-account deficit absorbs the vast majority of the world’s capital outflows. To finance this chronic deficit, the United States has amassed trillions of dollars of foreign debt, leaving itself vulnerable to sudden changes in the sentiment of global investors.
A variety of forces, including demographics, technological change, and shifts in consumer demand, could cause the United States to export more and import less. But the further depreciation of the dollar is the most direct correction mechanism—and the most widely anticipated one. The uncertainty surrounding such a correction complicates efforts to establish priorities for business investment and government policy.
New research from the McKinsey Global Institute (MGI) offers some guidance. Our findings suggest that the depreciation will most likely be gradual—but would have to be very large to eliminate the deficit. This depreciation would lead to significant changes in the current pattern of world demand and trade.
If the dollar were to fall sharply, European demand for many types of financial and business services from the United States would increase, and European companies would find the United States a more attractive location to build manufacturing and R&D facilities. US policy makers should cultivate the open and competitive environment necessary for continued innovation in these sectors.
The US trade deficit with many Asian countries, including Japan, South Korea, and Taiwan, would become a trade surplus. Many Asian companies would have to intensify their efforts to increase exports to non-US markets and would find US companies more competitive in their own domestic markets. In contrast, China would retain both its manufacturing cost advantage and its trade surplus with the United States—suggesting that industry groups should focus less energy on pressuring China to revalue its currency.
As the dollar declined, Canada and Mexico would lose their manufacturing cost advantage, and imports from the United States would increase, particularly in high-tech products and machinery. This would create a new set of employment challenges and opportunities across the entire North American Free Trade Agreement (NAFTA) region. Companies in Canada and Mexico should prepare for the potential depreciation of the dollar—for example, by strengthening their efforts to export to Central America.
MGI reached these conclusions by analyzing two very different five-year scenarios describing the evolution of the US current account. (For more detail, see the full report, The US Imbalancing Act: Can the Current Account Deficit Continue? available free of charge online.) In the first, we assessed whether it could continue to grow over the next five years if exchange rates remained the same and whether the rest of the world could finance an ever-larger US deficit. The second scenario describes a world where the dollar depreciates enough to eliminate the entire US current-account deficit—by some 30 percent from the dollar’s level in January 2007—and the impact on trade patterns. While reality is likely to lie somewhere between these two extremes, understanding them should help business leaders and policy makers better prepare for what lies ahead.”
One Response to “Editor Pick – Businesses and U.S. Current Account Deficit”
Morrison Bonpasse • July 30th, 2007 at 7:23 pm
The long term answer to current account problems and currency fluctuation problems is to move deliberately to a Single Global Currency. There are zero current account problems now among the eurozone countries.
There are other benefits as well: save $400 Billion in annual foreign exchange transaction costs and avoid currency crises. For more information see http://www.singleglobalcurrency.org
