At the recent Group of 20 (G 20) meeting, U.S. Treasury Secretary Timothy F. Geithner called upon the largest industrialized economies to get their current account balance -- whether a surplus or a deficit -- below 4 percent of their gross domestic product by 2015. Four countries have current account surpluses exceeding 4 percent: Saudi Arabia (6.7 percent), Germany (6.1 percent), China (4.7 percent) and Russia (4.7 percent.) Countries like Russia and Saudi Arabia that are "structurally large exporters of raw materials" would be exempt from the 4 percent limit, so the pressure of the U.S. proposal falls mainly on China and Germany. Our annual trade deficit of $500 billion is less than 4 percent of our GDP.
Acting on behalf of various interest groups, politicians fret over trade deficits but is it something that ordinary Americans ought to worry about? What politicians and inept people in the news media, whose duty is to inform, never bring up is that in the international trade arena, there are two accounts. One is called the current account, which consists of goods and services exchanged between Americans and foreigners. That's the account where we have a large trade deficit. Americans buy more goods and services from foreigners than they buy from us.
There's another account called the capital account. It consists of foreign direct investment in the U.S. such as the purchase or construction of machinery, buildings or even whole manufacturing plants plus foreign purchases of stocks, bonds and currencies. For example, Toyota might sell me a Lexus, manufactured in Tahara, Japan for $70,000 but not purchase any American goods such as wheat, cotton or steel. That means there is a $70,000 trade deficit with the Japanese. What will the Toyota seller do with the $70,000? It would be wonderful if Toyota and other foreign producers just treasured dollars and simply stored them. We'd be on easy street having a few Americans printing up dollars whilst the rest of the world sends us cars, computers, coffee and other goods in exchange for them.
It doesn't work out that way. In our example, instead of purchasing American goods with the $70,000, Toyota might put the money toward building a Toyota plant, as it has already done, in Huntsville, Ala., that employs nearly 800 Americans. As a result of that current account deficit of $70,000, we have a capital account surplus (net inflow of capital into the U.S.) of $70,000.