Cause And Effect Analysis Of The U.S. Current Account Deficit

The current account, which is known as goods and services account, refers to the goods and services transactions. It is an important project of international balance of payments. It includes the import and export of tangible goods, invisible trade, such as expenditure of transport, tourism, and the international transfer payments, such as aid, remittances, and gifts and so on. The current account includes four categories: goods, services, and income and current transfers. The analysis methods of the current account include export-import method, flexible method, savings-investment method, capital outflow-inflow method and inter-time analysis. The measurements of the United States current account mainly are the proportion of the current account deficit in the Gross National Product, the financial deficit, net foreign-hold assets, U.S.dollar reserves and trade deficits. The trade deficit is the most important one.Since 1977, the United States current account balance has been deficit and the size of the deficit continued to expand. In 2005 the deficit was 791.5 billion U.S. dollars, accounting for 6.4% of the GDP of the United States. It is 856.7 billion U.S. dollars in 2006, 6.5% of GDP.The most important manifestation of the United States current account deficit is the continuous expansion .The trade deficit, 24.4% more than 2003, was 617.7 billion U.S. dollars in 2004, accounted for 5.3% of GDP, setting a new high record. The trade deficit was partially offset by service trade surplus which grew faster. In 2005, services accounted for 21.5% of the total volume of foreign trade. Services trade surplus was 58.02 billion U.S. dollars, offset the merchandise trade deficit by 8.1%.This article includes four parts. First part provides an impact analysis for the corresponding analytical based on the basic concepts and theories; The second part describes the situation of the United States current account deficit, and analyses the reasons of the current account deficit from theoretical to practical; The third part, stated the effects of the United States current account deficit on the United States itself, the world economy and China respectively. Such effects include both negative and positive effects; Part IV suggests measures on how to deal with the impact of the current account deficit, also suggests references on how to maintain balance under the condition of China's trade surplus in the current account balance.There are three major causes of current account imbalances in the United States: theory reasons, practical reasons as well as international reasons. The theory reasons of the U.S. current account imbalance mainly include: firstly, the United States productivity continued to improve. People are optimistic about the economy, the domestic demand increased; the imports of goods increased, however, as the result of a series of financial crisis, the depreciation of the exchange rate policy was applied in many developing countries. This led a sharp dropped in output and domestic demand dropped much greater. The domestic economy developed slower, and the demand increase for American products was slow, so the U.S. trade deficit was massive. Secondly, the global savings structure imbalance is another reason of the U.S. current account deficit. Large savings flowed into the United States during the 1990s of the 20th century, the stock price in the United States boomed and the dollar rose. The U.S.current account made corresponding adjustment .The ultimate result is the expansion of the U.S. savings-investment gap, resulting in the rapid expansion of the current account deficit.Practical reasons of the United States current account imbalances include: domestic consumption and investment demand rose, but the saving rate declined; The surplus in services trade are insufficient to cover the huge deficit in goods trade; strengthen controls on exports of high-tech products; industrial restructuring and the transfer of industries and the manufacturing recession; the financial deficit and the low interest rate policy.The international reasons of the U.S. current account imbalance include: international oil prices rose; Imbalance in world economic growth; other countries'over-savings to hold dollar-denominated assets.Besides, the reasons of the United States current account imbalances include the exchange rate , Transnational companies'inner transactions, as well as the statistical error.As the world's most developed country, the impact of the United States current account deficit is very big .First of all, there are a positive side and a negative side of the impact on the United States itself. The positive side is that it attracts foreign investment and economic growth; the U.S.enjoys cheaper imported goods, improves productivity of domestic enterprises; promotes industrial upgrading; prevents the economy from overheating, creates a favorable economic environment. But at the same time the current account imbalances weakens dollar's reserve position in the international. Second, the United States current account imbalances'impact on the global economy was tremendous. The huge U.S. trade deficit increased other countries'economic development and helped readjust the industrial structure of the developing countries .But at the same time it also created a global current account imbalance and trade friction and increased the uncertainty of the world economy development.China is the major source of the United States trade deficit. The impact of the U.S. current account imbalance on China is mainly the following aspects: Firstly, China has a lot of dollar foreign exchange reserves. Due to the depreciation of the dollar China is facing the embarrassing situation of high risk but low returns; Secondly, China is the largest U.S. trade deficit origin country, so China has to face the United States trade restrictions in many areas especially in the area of anti-dumping, while China is one of the biggest victim; Thirdly, the Sino-U.S. trade friction, particularly in the area of intellectual property. United States using "301 Terms" to survey on the issues related to our intellectual property; Fourthly, the Renminbi is facing enormous pressure to revalue. The United States trade deficit with China is so large that The United States imposed on Renminbi revaluation to reduce the costs of imports and narrower the trade deficit with China.The impact of the U.S. current account imbalance on China is enormous. Therefore, China must adopt certain measures to cope with the impact brought by the U.S. current account imbalance. Specifically, namely(1) Adjust the balance of payments;(2) Expand domestic demands, strengthen the capacity to withstand external shocks;(3) Establish trade coordination mechanism, and reduce trade friction.(4) Persist autonomy in monetary policy.(5) Effectively reduce the revaluation pressure of Renminbi.