America's growing current account deficit has set off alarm bells among many economists and policy makers. But today's debate misses its mark by ignoring the trade between multinational companies, their foreign affiliates, and consumers. What is needed is a global, rather than national, view on the deficit and policies to ensure the best global economic outcomes.
America's record-breaking current account deficit has set off alarm bells about the health of the US economy, with many commentators lamenting America's low savings rate and insatiable appetite for foreign goods.
Policy makers have responded with a variety of proposals, such as giving tax breaks to exporters, renegotiating bilateral trade agreements, encouraging the Chinese government to appreciate the yuan, and limiting imports through quotas or tariffs.
But before any such action is taken, policy makers should consider the fact that nearly one third of the overall US current account deficit is due to the foreign activities of US—based companies—activities that can create enormous value for US consumers, companies, and shareholders.