Multinationals and CADs
As current account deficits in the US and other English speaking countries continue to balloon, there’s a big demand for talking points in support of a “Don’t Worry, Be Happy” position. A favourite contender is the idea that the US trade and current account deficits are overstated because about half of all US imports come from overseas subsidiaries of US multinationals. For those who’d like to get straight to the bottom line, this fact makes no difference to the current account deficit or its sustainability.
For those who enjoy somewhat eye-glazing arguments about economic statistics, read on.
The claim gets a (somewhat confused) run, in this generally informative NYT piece by Louis Uchitelle
American companies with operations abroad now account for nearly 48 percent of the nation’s imports, the Commerce Department reports, up from an average of 45 percent in the 1990’s … Indeed, the American-made content of a heart stent, a jet aircraft engine, or any imported item might be 50 percent of its value or more. But in the trade statistics, that distinction is not made; the entire value is listed as an import.
Uichitelle is mixing up two different things here, but neither of them make any difference to the current account deficit in the long run.
Taking the second point first, many imported items incorporate US exports. As he acknowledges, the US contribution gets counted in US export figures, so there’s no net effect on trade and current account balances.
The first point is the one most Pollyannas have focused on. But, if US-owned firms make goods overseas, they earn a return to capital which is ultimately repatriated to the US as dividends or capital gains. This goes into the current account balance, offset by the corresponding payments made by foreign-owned firms in the US. So even if the US had a positive net investment position, this would be fully reflected in the current account deficit.
In fact, taking debt and equity together, the US is now a net debtor, and net income payments are just about in balance. Net debt will increase, relative to GDP, as long as substantial trade and current account deficits are allowed to continue so net income payments must become large and negative in the future.
All of this is true in spades for Australia, since we never had any overseas assets to begin with. Unless you believe, with Ben Bernanke, that there is a permanent pool of savers in poor countries, eager to finance our consumption, the present trade and current account deficits are unsustainable, and the process of stabilisation is likely to be painful.
fn1. It’s probably true that the statistics underestimate the value of overseas US equity investments, since they don’t take full account of various forms of capital appreciation. This is partially responsible for the apparent higher rates of return earned by US assets abroad, compared to foreign-owned assets in the US. Similar points apply to the UK, which also has a negative net position on official measures, but manages a substantial income surplus.