Alan Reynolds

A recent Associated Press headline was, "Current Account Trade Deficit Posts Unexpectedly Large Improvement." It fell by 6.5 percent. But why assume that was an improvement? After all, the current account deficit "improved" during every recession, and even moved into surplus during the worst recessions of 1975 and 1980-81.

The Economist's survey of world forecasters estimates the current account deficit will reach 7.3 percent of GDP in Spain this year and 5.6 percent of GDP in Australia. I think the U.S. current account deficit will be about 6.5 percent, the flip side of which means that 6.5 percent of GDP measures the difference between foreign investment rushing into the United States minus the amount of U.S. investment flowing abroad. We have a large capital surplus, otherwise known as a current account deficit.

What do countries with large capital account surpluses have in common? Economic growth over the past year was 3.1 percent in Australia, 3.5 percent in Spain and 3.6 percent in the United States. The expected current account deficit is smaller in the United Kingdom (2.7 percent), yet British economic growth is also slower (2.2 percent). India's current account deficit is running about 2.5 percent of GDP. By contrast, Germany has a perpetual current account surplus and a pathetic economic growth rate that has long been stuck close to 1 percent.

Since the third quarter of 2003, U.S. exports of goods alone have increased at a 9.7 percent annual rate in real terms -- more than double the 4 percent growth of real GDP -- while real imports of goods increased at a 9.2 percent rate. The United States is a big exporter of plastics, aircraft, specialized industrial machinery, scientific instruments, corn, cotton and soybeans. But producing and shipping such products requires importing oil and natural gas.

In April 2006, imported oil and natural gas accounted for 34 percent of the U.S. merchandise trade deficit. That was not because we guzzled more oil. The quantity of imported crude oil was 7 percent smaller than a year earlier, yet the cost was 18 percent higher.

One of the most persistent myths about semi-free trade or globalization is the idea that countries with trade deficits must be losing manufacturing jobs to countries that run trade surpluses. Japan and Germany have run chronic trade surpluses for many years, particularly in manufactured goods, making it easy to find out if this theory works.

Alan Reynolds

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