Globalization and trade deficits

McK­in­sey com­plains that “definitions”: of the cur­rent account bal­ances are mis­lead­ing because they fail to show that the U.S. cur­rent account deficit is, in real­i­ty, a con­squence of the strength of the U.S. econ­o­my, as seen in the growth of U.S. direct invest­ment abroad and it’s enjoy­ment of the ben­e­fits of those invest­ments. bq. … Vehi­cles assem­bled abroad [by for­eign affil­i­ates of U.S. firms] and shipped back to the Unit­ed States count as imports, despite the fact that they are pro­duced by US com­pa­nies (empha­sis added). I don’t know any econ­o­mist who would dis­agree that the strength of U.S. demand (‘growth&#8217)and the U.S. invest­ment cli­mate is a major fac­tor behind their cur­rent account deficit and cap­i­tal account sur­plus. But the McK­in­sey authors thinnk that this ortho­dox obser­va­tion mer­its a rad­i­cal change to the def­i­n­i­tion of an import and an export. bq. … the Unit­ed States should change the way its trade bal­ance is cal­cu­lat­ed, by tak­ing an own­er­ship-based view of trade and cat­e­go­riz­ing com­pa­nies by where they are owned rather than by where their goods are pro­duced. This new met­ric would count the sales of US for­eign affil­i­ates, but sub­tract imports from them, and would strip out the sales by US affil­i­ates of for­eign com­pa­nies, thus reflect­ing the full eco­nom­ic activ­i­ty of US com­pa­nies no mat­ter where pro­duc­tion is based—and result in a much small­er deficit. This is an extra­or­di­nary sug­ges­tion that has no chance, I would guess, of being accept­ed in the IMF, which over­sees con­ven­tions on BOP def­i­n­i­tions, and is not like­ly to be wel­comed even by U.S.-owned multi­na­tion­al cor­po­ra­tions when they think through its impli­ca­tions. McK­in­sey’s recom­me­na­tion would evap­o­rate one third (they say) of the U.S. cur­rent account deficit by an account­ing slight-of-hand that re-defined the exports of Europe, Cana­da and East Asia, for exam­ple, as U.S. trans­ac­tions if firm respon­si­ble for the export had major­i­ty U.S. own­er­ship. What chance is there that the gov­ern­ments of those coun­tries will agree to this? Buck­leys. What chance is there that U.S. multi­na­tion­als will wel­come a sys­tem that shows them mak­ing reduced con­tri­bu­tions to the trade bal­ances of their host economies? Less than none, is my guess. The whole idea of this re-def­i­n­i­tion seems screwy to me; a project dri­ven by some mis­placed US loss of self-esteem. The bal­ance on cur­rent account is only a bal­ance not a badge of rank and not a beau­ty parade. It is an account­ing device to describe a dis­tri­b­u­tion of exter­nal resource flows. Run­ning a deficit on cur­rent account is only an alter­nate way of say­ing that the exter­nal bal­ance com­prised a sur­plus of cap­tial flows: pri­vate invest­ments that the USA is suck­ing in from abroad. The dis­tri­b­u­tion of flows allows us to make infer­ences about the econ­o­my of the ter­ri­to­ry and about the rela­tion­ships between economies in dif­fer­ent ter­ri­to­ries. The dis­tri­b­u­tion of exter­nal flows among goods, ser­vices and pay­ments in any one econ­o­my and the dis­tri­b­u­tion of pay­ments and cur­rent account bal­ances among dif­fer­ent economies is typ­i­cal­ly a response to gov­ern­ment poli­cies. It is true, how­ev­er, that pri­vate behavior—especially in large cap­i­tal­ist economies such as the USA, Japan and Europe—can be a sig­nif­i­cant vec­tor of change in the dis­tri­b­u­tion although, ulti­mate­ly, one that also responds to the envi­ron­ment cre­at­ed by gov­ern­ment pol­i­cy. If McK­in­sey’s re-def­i­n­i­tion pro­pos­al were accept­ed, we’d be focussing on the symp­toms rather than the eti­ol­o­gy of glob­al bal­ances: it would impov­er­ish our under­stand­ing of the world econ­o­my. We would swap data about the impact of nation­al poli­cies for data about pri­vate flows—transactions between relat­ed parties—and the ‘nation­al­i­ty’ of firms: a con­cept that has lit­tle cur­ren­cy in a glob­al mar­ket envi­ron­ment, even among the firms them­selves. Steven Kirch­n­er also argues, fol­low­ing McK­in­sey, that the growth of ‘glob­al­iza­tion’ prob­a­bly means that cur­rent account deficits will be big­ger in the future than in the past because invest­ment is becom­ing a more fre­quent sub­sti­tute for (export) trade. This is an intrigu­ing spec­u­la­tion. But I’m not so sure that it’s right: after all, most devel­op­ing coun­tries have to run trade deficits, too, in order to grow (more invest­ment than sav­ings). We can’t all exist on high­er cur­rent account deficits: by def­i­n­i­tion the glob­al accounts have to bal­ance, more or less, over time. Some coun­tries have to be in sur­plus (high­er sav­ings than invest­ments). The USA—as even McK­in­sey seems to acknowl­edge when it dis­cuss­es the oth­er two thirds of the U.S. cur­rent account deficit that is not ‘explained’ by imports from for­eign affiliates—is com­pet­ing with poor coun­tries for cap­i­tal inflows by run­ning huge cur­rent account deficits. I can’t see, there­fore, how cur­rent account bal­ances can be more neg­a­tive (that is, cap­i­tal account bal­ances more pos­i­tive) in indus­tri­al­ized economies as a gen­er­al rule in future, unless glob­al­iza­tion—in which the exter­nal accounts of devel­op­ing coun­tries play a major role—runs out of steam.

Leave a Comment

Your email address will not be published. Required fields are marked *