The US Current Account and Globalisation

Diana Farrell at the McKinsey Global Institute has been doing some excellent work highlighting the growing irrelevance of a residency-based view of trade, which ignores the increased importance of cross-border ownership of equity capital in driving current account balances.  Farrell estimates that one-third of the US current account deficit is attributable to trade with US-owned foreign subsidiaries.  Moreover, 

For at least the next decade, we would expect foreign investment by US multinationals to go on adding to the current-account deficit as it is currently measured. After all, globalization is in its infancy.

Record current account deficits should not be a surprise in this context, since globalisation should bring about a structural deterioration in the measured current account balance.  Insofar as this deterioration is symptomatic of globalisation, it should be welcomed rather than feared.  Farrell suggests moving to an ownership-based measure of trade balances, which might help defuse current account deficit angst.

posted on 25 March 2005 by skirchner in Economics

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