The Role of Currency Realignments in Eliminating the US and China Current Account Imbalances

The high level of current account imbalances continues to be a major focus of international concern. In this paper I suggest why public and private actions in the United States and China are now likely to cause the current account imbalances in those countries to shrink and perhaps even to disappear in the next few years. If that happens, it will eliminate the largest current account imbalances in the global economy. The United States now has a current account deficit of about $500 billion or 3.5 percent of US GDP. China has a current account surplus of about $300 billion or 6 percent of its GDP.

Although natural market forces should resolve such imbalances without the need for specific government policies, the government actions in both countries have actually contributed to their persistence and prevented market forces from correcting the problem. That may be about to change.