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US Current Account Deficit

The Issue

From 1991 through 2006, the US current account deficit—the broadest measure of US trade in goods and services and income and transfer payments—rose from roughly zero to 6 1/2 percent of US GDP, with about 40 percent of the increase occurring after 2001. The growth of China's current account surplus has been a key counterpart to the widening US deficit as were surpluses of other Asian countries from 2001 to 2005 and surpluses of oil-exporting countries (including Russia), especially from 2005 through mid-2008.

The 2008–09 global economic crisis and recession have reduced the US current account deficit—via a sharp decline in oil prices, slow growth, and falling imports—for the near term, but these gains are likely to be short-lived. Once the economy is back on a steady growth path, the current account deficit will at best return to about 4 percent of GDP, eventually testing the limits of external debt sustainability. But if the post-recession, long-term US fiscal deficit skyrockets, to 10 percent of GDP instead of adjusting to 2 percent—because of uncontrolled spending on health care and Social Security—the current account deficit and foreign debt could explode. By 2030 the current account deficit would soar to more than $5 trillion annually, or more than 15 percent of US GDP, if policymakers fail to take decisive action to reduce the size of future budget deficits once the economy improves enough to do so. As a result, the net foreign debt of the United States would rise to $50 trillion, or more than 140 percent of GDP—far above any conceivably sustainable positions. The nation could be transferring about 7 percent of GDP annually to foreigners by 2030 to service its huge international debt. Projections by William R. Cline (see chapter 2 [pdf] in The Long-Term International Economic Position of the United States) come at a time when many in Congress and the Obama administration, and especially the private financial markets, are warning of mounting budget deficits and government debt.

Lower tax revenues (due to falling income) and increased spending to stimulate the economy and address financial-sector challenges will significantly increase the federal deficit and debt levels in the next few years. But more must be done to address the serious fiscal challenges posed by the ever-escalating costs of health care and retirement. These challenges will exist even when the markets stabilize and the economy improves, posing a threat to the nation's economic and national security interests, and should be addressed once the economy begins to grow again. Failure to take remedial fiscal action will virtually guarantee a dramatic erosion of the US international economic and financial position.

Essential Reading from the Institute

Article: The Dollar and the Deficits: How Washington Can Prevent the Next Crisis
by C. Fred Bergsten, Peterson Institute for International Economics
Article in Foreign Affairs, Volume 88 No. 6, November/December 2009
November 2009

Book: Long-Term International Economic Position of the United States
Special Report No. 20
edited by C. Fred Bergsten
April 2009

Policy Brief 10-20: Renminbi Undervaluation, China’s Surplus, and the US Trade Deficit [pdf]
by William R. Cline, Peterson Institute for International Economics
August 2010

Op-ed: America Cannot Resolve Global Imbalances on Its Own
by C. Fred Bergsten, Peterson Institute for International Economics
and Arvind Subramanian, Peterson Institute for International Economics
Op-ed in the Financial Times
August 19, 2009

Congressional Testimony: Currency Misalignments and the US Economy
by C. Fred Bergsten, Peterson Institute for International Economics
Testimony before the Subcommittees on Trade, Ways and Means Committee; Commerce, Trade and Consumer Protection, Energy, and Commerce Committee; and Domestic and International Monetary Policy, Trade and Technology, Financial Services Committee of the House of Representatives
May 9, 2007

Policy Brief 07-4: Global Imbalances: Time for Action [pdf]
March 2007

Congressional Testimony: The Current Account Deficit and the US Economy
by C. Fred Bergsten, Peterson Institute for International Economics
Testimony before the Budget Committee of the United States Senate
February 1, 2007

Congressional Testimony: Why Deficits Matter: The International Dimension
by C. Fred Bergsten, Peterson Institute for International Economics
and Edwin M. Truman, Peterson Institute for International Economics
Testimony before the Budget Committee of the House of Representatives
January 23, 2007

Book: Is the U.S. Trade Deficit Sustainable?
by Catherine L. Mann
September 1999

Book: United States as a Debtor Nation
by William R. Cline
September 2005

Policy Brief 06-9: Can America Still Compete or Does It Need a New Trade Paradigm? [pdf]
by Martin Neil Baily, Peterson Institute for International Economics
and Robert Z. Lawrence, Peterson Institute for International Economics
December 2006

Policy Brief 05-4: The Case for a New Plaza Agreement [pdf]
by William R. Cline, Peterson Institute for International Economics
December 2005

Working Paper 05-6: Postponing Global Adjustment: An Analysis of the Pending Adjustment of Global Imbalances [pdf]
by Edwin M. Truman, Peterson Institute for International Economics
July 2005

Working Paper 05-11: The US Trade Deficit: A Disaggregated Perspective [pdf]
by Catherine L. Mann, Peterson Institute for International Economics
and Katharina Plück, Peterson Institute for International Economics
September 2005

Article: Managing Exchange Rates: Achievement of Global Re-balancing or Evidence of Global Co-dependency [pdf]
by Catherine L. Mann, Peterson Institute for International Economics
Article in Business Economics
July 2004

Article: Breaking Up Is Hard To Do: Global Co-dependency, Collective Action, and the Challenges of Global Adjustment [pdf]
by Catherine L. Mann, Peterson Institute for International Economics
Article published in the CESifo Forum
January 2005

Op-ed: When the Dollar Bill Comes Due
by Catherine L. Mann, Peterson Institute for International Economics
and Katharina Plück, Peterson Institute for International Economics
Op-ed
April 27, 2005

Book: United States and the World Economy: Foreign Economic Policy for the Next Decade
by C. Fred Bergsten and the Institute for International Economics
January 2005

Book: Dollar Adjustment: How Far? Against What?
edited by C. Fred Bergsten and John Williamson
November 2004