The key to rebalancing the global economy depends on narrowing the U.S. current account and trade deficits.
For years, the global economy has operated on a simple, if unstated, agreement: As the United States has imported more goods and services than it exports, its trading partners have used some of that money to finance America’s growing budget deficits.
The Trump administration has said that it wants to change that dynamic.
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To achieve this objective, the Trump administration will take the external route—using tariffs as leverage to narrow the deficits with the Chinese and other trading partners—rather than focus on internal fiscal consolidation, which would accomplish that task.
The external balance of the United States is comprised of the trade of goods, services and financial assets. The trade deficit accounts for the exchange of goods and services between two countries; the current account deficit is a broader measure of all transactions, including financial assets in addition to goods and services.
The trade of goods and services comprises about 77% of the current account deficit. Financial assets make up roughly 22% of the current account deficit. The United States runs large trade deficits with China, Mexico, Vietnam, Canada, Germany, Japan and Ireland.
Primary income, which includes transactions like the foreign purchases of U.S.-issued debt, is defined as financial assets. Secondary income, which includes transactions like foreign aid, is defined as transfer payments.
The relationship of the trade of goods and services to the overall current account can be seen in the value of the trade balance, compiled by the Census Bureau, and our estimated value of the current account, which is compiled by the Bureau of Economic Analysis.
The trade and the current account deficits are best judged relative to the total size of the economy and to the relationship of the U.S. economy to the global economy.
The U.S. current account deficit has widened since 1980, when the U.S. relinquished its role as the factory floor for the world.
Since then, the U.S. has strengthened its position as the financial and innovation center of the global economy.
This evolution is a logical step for a U.S. economy moving from its comparative advantage in agricultural and production to services and financial assets.
