Growing Trade, Shrinking Deficit

The Commerce Department reported this morning that America’s current account deficit checked in at $190.8 billion for the second quarter of 2007. The number will undoubtedly provide fodder for critics of trade who see exports as the sole measure of success in the global economy and rising imports as a sure sign of failure.

The latest report is certainly newsworthy, but not in the negative way that many pundits and politicians will portray it.

The current account represents the broadest measure of America’s trade with the rest of the world, accounting for not only trade in goods but also services, investment income (such as interest, dividends, and profits), and unilateral transfers such as foreign aid and remittances.

The real news in today’s report is that America’s trade with the rest of the world continues to climb to new records despite the hand-wringing by many members of Congress and misguided pundits in cable TV land. Although the overall deficit declined slightly from the first quarter, our imports from the rest of the world are up 8 percent from a year ago and our exports are up 13 percent.

And although the rest of the world owns about $2.7 trillion more in U.S. assets than Americans own in assets abroad, we continue to earn more on our total investments abroad than foreigners earn on their investments here — about $16 billion more so far in 2007.

In a speech in Germany earlier this week, Federal Reserve Board chairman Ben Bernanke explained why running a current account deficit isn’t necessarily bad news for the U.S. economy, at least in the short to medium run. Among his main points:

First, these external imbalances are to a significant extent a market phenomenon and, in the case of the U.S. deficit, reflect the attractiveness of both the U.S. economy overall and the depth, liquidity, and legal safeguards associated with its capital markets….

Second, current account imbalances can help reduce tendencies toward recession, on the one hand, or overheating and inflation, on the other….

Third, although the U.S. current account deficit is certainly not sustainable at its current level, U.S. liabilities to foreigners are not, at this point, putting an exceptionally large burden on the American economy.

Check out the Center for Trade Policy Studies website for more on what the trade deficit means and what it doesn’t mean.