Not in my backyard
For the past 20 years, the U.S. current account deficit has attracted much attention. Even though the deficit declined during the past year, primarily as a result of the recession, it continues to be of concern to many countries. The leaders of these countries like to complain about this deficit. But none are willing to do anything other than suggest that it is up to the U.S. to figure out a solution.
As I have written before, most of the solutions are not pleasant, especially for the the U.S.’s trading partners. The sum of all countries’ current account balances should net out to zero every year. With the U.S. running large deficits, all other countries combined are running equally large surpluses. If the U.S. manages somehow to eliminate its deficit, many other countries will experience a erosion in their current account balances. These other countries will suffer some combination of lower exports and higher imports. On their own, these adjustments will reduce GDP and employment levels in these countries, while GDP and employment in the U.S. improve.
But what country is willing to make the sacrifice to help the U.S. fix its current account deficit? So far, no country has stepped forward.
In Canada, the Governor of the Bank of Canada has complained that the sharp appreciation of the Canadian dollar against the U.S. dollar is threatening the fragile recovery. He has indicated that he would prefer a lower value for the Canadian dollar. But Canada runs a current account surplus with the U.S., and the appreciation of our dollar provides one means for reducing this surplus. However, Canada does not want to make the sacrifice. It is much easier just to complain.
Last week, a number of Southeast Asian countries acted in concert to stem a further appreciation of their respective currencies against the U.S. dollar. The sharp appreciation was threatening the competitiveness of their export sectors and their export-driven recoveries.
China continues to moderate the appreciation of the yuan against the U.S. dollar. China does not want a massive upward revaluation for this will jeopardize its nascent recovery as well. Obviously, none of the countries in Asia appear willing to make the sacrifice either.
How about other export-oriented countries, particularly those with current account surpluses? I do not see Germany, Japan, the Netherlands, Singapore, Sweden, Taiwan and others stepping forth.
Another round of significant devaluations of the U.S. dollar against most all other currencies is needed to turn around the U.S. current account deficit (this also would greatly diminish the net international indebtedness of the U.S.). While this will still happen, it will not happen quickly or voluntarily. Of course, the U.S. could introduce a massive carbon tax to reduce its dependence on imported oil, and the government could focus on spending and tax initiatives which enhance the competitiveness of U.S. companies. But a further devaluation is inevitable, and the adjustments will not be pleasant for the U.S.’s trading partners.
They should be careful for what they ask.