Global impact of US economic woes

IT is a policy mistake to downplay, let alone ignore, the seriousness of the implications of the unsustainable current account deficit of the US, both within and without. The US current account deficit has continued to soar without respite in recent times, at the rate of roughly US$2bil a day, setting an all-time record close to 6% of gross domestic product (GDP) in 2004.

It is simple arithmetic that the reverse side of the balance-of-payments current account deficit of the US comprises the surpluses of some of its trading partners. Thus, the US accounts for about 70% of the current account surpluses of other countries, notably China, Japan and Germany.
This simply means that the US current account deficits cannot be reduced unless other countries are willing to reduce their own current account surpluses. Thus, the burden of adjustment will have to fall on both sides of the equation. This calls for the depreciation of the deficit country’s currency and the appreciation of the surplus countries’ currencies.

A cheaper dollar would reduce the US trade gap by encouraging the country’s exports and discouraging its imports. The reverse would indeed be the case for other countries that currently enjoy large surpluses with the US. In other words, by definition, the US trade deficit can fall, only if America’s trading partners are prepared to have their surpluses slashed by allowing their currencies to appreciate.

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