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US current account deficit narrowing may not slow world trade

By: | at 07:00 PM | International Trade  

A narrowing of the US current account deficit would not necessarily cause a slow-down in global merchandise trade growth, the World Trade Organization (WTO) said.

The impact on world trade growth of a rebalancing of the US current account would depend on the nature of the adjustment, it said in its World Trade Report.

“If the adjustment occurs through an acceleration of the growth of US merchandise exports, with only some modest adjustment on the import side, then the unwinding of the US deficits need not represent an adverse shock to world trade,” it said.

Economists believe large current account deficits are unsustainable as in the end foreigners will be unwilling to continue to finance them by accumulating assets in a currency that will come under pressure to decline. The US deficit was running at 6.6% of GDP in 2006.

A side effect of the big deficit, which it seems will inevitably narrow, was higher growth in world trade, it said.

Many countries had been willing to produce and ship more goods to the United States than could be paid for by exports of US products to them, helping fuel the world economy, it said.

“The US trade deficit has thus represented a hefty source of demand growth to the world economy,” it said.

Previous adjustments to US current account deficits from 1970 to 1990 support the “soft-landing” scenario, it said.

In the three examples in this period, exports played an important role in facilitating the adjustment towards current account balance, it said.

US nominal exports grew strongly each time, by more than 40% in 1973, and close to 30% in 1979 and 1988. US import growth slackened in each period but did not fall off precipitously until the last episode of adjustment, it said.

Adjustments to current account imbalances are complex processes, it noted. Accelerated US export growth would require increased demand for US goods from the rest of the world.

That in turn would need to be triggered by the right kinds of movements in exchange rates, and asset and goods prices.

“A more liberal trading system would also facilitate this adjustment,” the WTO said. (Reuters)