McKinsey complains that “definitions”:http://www.google.com.au/search?hl=en&lr=&client=firefox&rls=org.mozilla:en-US:unofficial&oi=defmore&q=define:current+account+balance 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’)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.
Peter Gallagher is student of piano and photography. He was formerly a senior trade official of the Australian government. For some years after leaving government, he consulted to international organizations, governments and business groups on trade and public policy.
He teaches graduate classes at the University of Adelaide on trade research methods and the role of firms in trade and growth and tweets trade (and other) stuff from @pwgallagher