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What businesses need to know about the US current-account deficit

The US import balancing act could continue for some time, but the correction, when it comes, will have surprising consequences. Governments and businesses should prepare for them.

AUGUST 2007 • Diana Farrell and Susan Lund

US current-account deficit article, global trade changes, Economic Studies

Sidebar 1: Understanding the current account
Sidebar Exhibit 1: The trade deficit on goods is the largest component of the US current account.
Sidebar Exhibit 2: The current account and capital account should mirror each other.
Exhibit 1: McKinsey Global Institute posited two scenarios with vastly different outcomes for the US current account.
Sidebar 2: Who finances the US current-account deficit?
Sidebar Exhibit 1: Foreign investors from each region buy different types of US assets.
Sidebar Exhibit 2: Asia, Europe, and the oil economies have become the world’s net capital exporters.
Exhibit 2: The returns on foreign assets are higher than payments to overseas investors; the US foreign debt is smaller than the sum of past current-account deficits.
Exhibit 3: MGI considered three variations of a major dollar depreciation.

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. Many economists believe that the deficit is unsustainable and that a major correction involving a significant depreciation of the dollar looms¹ (see sidebar “Understanding the current account").

	Toggle Sidebar
	Understanding the current account A country’s current account keeps track of different types of purchases and transfers among countries. It consists of four components, each of which can be in surplus or deficit: Trade in goods, or funds paid for the delivery of goods Trade in services, or funds paid for the delivery of services Transfer payments, or funds that are exchanged for other reasons, such as remittances sent abroad by immigrants and foreign-tax payments Net foreign income, which includes both foreign-income payments (such as interest payments on loans from other countries) and foreign-income receipts (such as profits from overseas subsidiaries) The US current account is in deficit because the US imports more in these four categories than...