Mann argues U.S. trade deficits, though large, continue to be sustainable in near term

• Author: Prakash Loungani
• Position: IMF External Relations Department
• Pages: 97-98

Page 97

Is the U.S. trade deficit sustainable? On this issue, when Catherine Mann speaks, people listen.Mann, a Senior Fellow at the Institute for International Economics (IIE), is the author of an authoritative 1999 book on the issue (see her article in Finance & Development, March 2000, for a summary).

In her book,Mann predicted that U.S. trade and current account deficits, though a matter of long-term concern, were sustainable in the near term, certainly "for two or three more years."At a March 1 talk organized by the IIE,Mann updated her analysis and said she saw no reason to change her earlier prediction that the deficits, though large, would be sustainable through 2001-02. (Mann considers the deficit to be "sustainable" in the sense that it is unlikely to generate any economic forces of its own that would bring about a significant reduction.)

Mann did caution that global investors could decide that U.S. assets account for so large a share of their portfolios that they scale back their holdings of these assets. Under such a scenario, asset prices would have to adjust to reflect this change of sentiment in global markets; most likely, the exchange value of the dollar would decline. However, she assigned a low probability to such a scenario unfolding this year.

What drives the deficits?

According to Mann, the U.S. trade and current account deficits are principally the outcomes of the stronger economic performance of the United States relative to that of its trading partners. There are two aspects to the stronger performance. First, U.S. real GDP growth over the past few years has been stronger than in its partner countries. Second, investments in U.S. assets continue to provide high returns (adjusted for risk) to global investors.

Rapid real GDP growth in the United States fuels an increase in import demand that far outstrips the growth of exports (which depends on the real GDP growth of its trading partners). As a result, the United States cannot pay for its desired imports through its exports, thereby generating large trade and current account deficits.Mann refers to this as the "real side" or the "U.S. perspective" on the deficits.

But the same transactions can be viewed from what Mann calls the "financial side" or the "global perspective."

The United States pays for its current account deficits by borrowing from the rest of the world. This...