Us Current Account Deficit Analysis Paper

US Current Account Deficit Analysis Paper **Figures and Exhibits mentioned in this write up are from the case article itself.

The US maintains its position of being one of the biggest and strongest economies in the world. Almost every country has a trade relationship with the US and currencies are automatically pegged against the USD. Despite this, it has a long-standing current account deficit that has persisted throughout several administrations.

A current account is the measure of a country’s exports and imports of goods, services, capital, net income from abroad and net current transfers. It is crucial as it is one of the main indicators of an economy’s health. CA = (X-M) + NI + NCT.

In addition to this, beyond being the country's accurate measure, current account can also be the measure of trade. The reason for this is that it includes not only imports and exports but also the financial activities, investment flows and other payments between the United States and the rest of the world. S-I = (X-M).

A current account is in deficit when a country’s value of imports exceeds the value of its exports -- this means that the US is buying more foreign goods and services than they are exporting domestically produced goods and services. This outcome is fueled by the overall workings of the world economy. Since the US is still seen as a one of the best countries where investments are secure, foreign direct investments continue to pour in making the US currency stronger. A strong currency makes foreign goods seem to be more affordable than domestic goods which results to higher imports.

How do present US actions affect the US Current Account deficit?

1. Foreign Investments in the US Foreign investments are one of the major contributors to the current account deficit. The US is perceived as a safe haven for investment among the potential countries due to its recognized economic strength and stability. Therefore, there is still an increase in foreign assets in the United States since 2007, leading to an all-time low of -45% NIIP in 2016 (From Exhibit 7). This continuous inflow of foreign investments into the United States overvalues the Dollar, increasing the prices of domestic goods relative to imports.

Some of the major investors in the US are the member countries of the Trans-Pacific Partnership (TPP) which includes Japan, Malaysia, Vietnam, Singapore, Brunei, Australia, New Zealand, Canada, Mexico, Chile, and Peru. TPP aims to ease foreign investments by removing tariffs and other trade barriers. However, Trump withdrew from this agreement to stop the inflow of foreign goods to the country

In this regard, US hopes to discourage the foreign capital inflow and therefore decreasing the trade deficit.

2. Trade Balance Amongst all the factors, the largest component of the US current account deficit is the trade deficit (imports > exports). In 2016, this comprised of negative $505 Billion in the current account deficit (from Figure 4a, Net Goods + Net Services). This means that the US becomes more dependent on other countries, most especially if they import commodities like consumer goods and petroleum, as can be seen in Figure 4c where there is an increasing demand for these

Economics 2nd WAC, Prof. Manuela LT5 Bagadiong. Barraza. Chua. Fernando. Gyawali. Margallo. Reyes

imported goods. In fact, looking at China, the US’ largest trade partner, US exports 8% while China exports 21% resulting in a huge difference of 13% for the US; not favoring the US (from Figure 13). This huge trade deficit with China is primarily driven by the large gap between currency rates that continue to widen between the U.S. and China since 2011 (From Exhibit 6), leading to the cheaper prices of China’s goods compared to the US' domestic goods.

Currently, Trump’s policies are primarily directed at tackling the Trade Balance to be able to address the Current Account deficit. Included in these policies is the imposition of high tariffs on imported goods from Mexico and Canada (NAFTA member countries). In isolation, the effect of tariffs or even a ban on imported goods would increase the price of imported goods thereby, making the domestic counterparts more competitive and expectantly increase its demand. However, this increase in domestic product demand would eventually drive up the prices of domestic products and level it again with the price of the imported goods even if the latter is subjected to tariffs. This would eventually revert back the demand in consumption of imported goods. Moreover, goods from other trading countries may serve as a substitute for US consumers.