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Unformatted text preview: 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. Diana Farrell and Susan Lund 2007 Number 3 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 looms 1 (see sidebar, “ Understanding the current account "). New research from the McKinsey Global Institute (MGI), however, finds nothing inevitable about a correction in the US current-account deficit over the next five years. Instead, it could continue to grow, and the world would have enough capital to finance it. Any correction from shifts in exchange rates could occur very gradually, over a period of many years. Yet while a large, sudden depreciation in the dollar is unlikely, the magnitude of today’s imbalances and the pressure they place on the dollar remain significant. Business and government leaders would therefore be wise to plan for the changes in world demand and trade that could follow if a correction were to occur. In general, US goods and services would be significantly more competitive in the global economy, and foreign companies would find the United States a more attractive location to build manufacturing and R&D facilities. Specifically, European demand for many types of financial and business services from the United States would increase. The US trade deficit with many Asian countries, including Japan, South Korea, and Taiwan, would become a trade surplus, as would its current trade deficit with Canada and Mexico. In contrast, China would retain both its manufacturing cost advantage and its trade surplus with the United States. Two views of the future 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 the US current- account deficit 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 positsa 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 subsequent impact on trade patterns. MGI created the scenarios by using a microeconomic approach to analyze the effects of a depreciation of the dollar on demand for 30 different product categories in 100 countries, as well as on US foreign assets and liabilities. The two scenarios different product categories in 100 countries, as well as on US foreign assets and liabilities....
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This note was uploaded on 04/06/2012 for the course ECON 202 taught by Professor Sanjeev during the Spring '12 term at Indian Institute Of Management, Ahmedabad.
- Spring '12