The US trade deficit does not spell doom
news.ft.com
Trade between foreign affiliates (as offshore subsidiaries are called) and US companies and consumers can either inflate or diminish the current account balance. When Ford or General Motors produce vehicles in Mexico they sell many to American consumers, causing US imports to rise. But they also sell a significant number in Mexico, generating a positive income flow to the US current account, and they use technologies and components produced north of the border, boosting US exports.
Any net negative impact on the trade balance caused by foreign affiliates is more of an accounting anomaly than a cause for economic concern. Methods for measuring the current account date back to the 1940s, when few companies had operations outside their home countries. Today, many companies have established subsidiaries abroad to tap new markets and take advantage of lower labour costs. Trade accounting methods have not kept pace with these changes: goods bought from US foreign affiliates count as imports on the current account, even though American companies produce them.
To say that today's record current account deficit reflects a weak US economy or spells doom for the nation is thus incorrect. Sales through US foreign affiliates abroad have topped $2,900bn, roughly three times the value of US exports. These sales generated $134bn in income for their US parent companies in 2002, and added nearly $3,000bn to their market capitalisation.
For at least the next decade, multi national company investment abroad should continue to add to the US current account deficit. In 2004, worldwide foreign direct investment flows topped $600bn, a record. Much of it went to emerging markets, where labour or land costs are one-tenth of those in the US. Even a significant fall in the value of the dollar is unlikely to affect this.
FWIW |
