Naar de inhoud
Steven’s StudyHub

Lecture 1B: Reading current accounts and trade wars

Start here if this is new to you

This chapter is about reading tables of real numbers. Two habits make it easy. First, always look at the sign: a minus means the country paid out more than it received for that item. Second, compare amounts with the size of the economy (as a percentage of GDP), not in dollars: a $50 billion deficit is huge for Greece and small for the United States. The tables use "bn" for billion (a thousand million) and "tn" for trillion (a thousand billion); US GDP is about $20 tn in 2020, euro area GDP about €11 tn.

The second half asks a question you will hear in the news: can a country "win" a trade war by reducing its deficit with one partner? Keep the difference between a bilateral balance (with one country) and the total balance (with everyone) in mind.

Reading real numbers: the US and the euro area in 2020

US 2020$ bn% GDP
Current account−647.2−3.1
Trade balance (goods −915.6, services +233.9)−681.7−3.3
Income balance (NII +190.9, employees −9.3)181.60.9
Net unilateral transfers (private −127.1, government −20.0)−147.1−0.7
  • Check the sum: −681.7 + 181.6 − 147.1 = −647.2. Most of the US deficit is the trade deficit; in the US the TB and CA are similar in size and move together over time.
  • The US has a goods deficit (it imports phones, computers, car parts) and a services surplus (it exports education, research, health care, consulting).
  • NII is positive: the US earns more on its foreign investments than it pays to foreigners, even though it owes far more than it owns. That is a puzzle; see the paradox at the end.
  • Euro area 2020 (only trade with countries outside the euro area): CA +€248 bn (+2.2% of GDP), the mirror image of the US. It comes from goods (+3.0%); services +0.3%; primary income +0.2%; secondary income −1.4% (EU budget, aid, remittances).
  • Caution: trade between euro countries is left out. German exports to France are not euro-area exports, just as trade between Texas and California is not US trade. The relevant unit is the currency area. When a country joins (Croatia 2023, Bulgaria 2026), measured euro-area trade mechanically shrinks.

Every combination of signs is possible

For most countries the trade balance is the biggest part of the CA (in a chart of 82 countries most dots lie near the 45-degree line). But because CA = TB + income + transfers, the CA can be bigger, smaller, or even of opposite sign. The composition tells you what kind of economy it is. All numbers in % of GDP, 2019:

CountryTB + income + transfers = CAWhat it tells you
Germany5.7 + 3.2 − 1.4 = 7.5Classic creditor: sells a lot abroad and earns income on assets bought with past surpluses.
China0.9 − 0.3 + 0.1 = 0.7A creditor that still pays net income: it owns safe, low-yield assets (reserves, Treasuries) and owes high-yield ones (profits of foreign firms in China).
Nicaragua−4.3 − 3.7 + 14.0 = 6.0Trade deficit, but emigrants send home 14% of GDP, which turns the CA positive.
Argentina2.9 − 4.0 + 0.2 = −0.9Sells more than it buys, but as a big debtor its interest payments swallow the trade surplus.
Canada−1.6 − 0.3 − 0.1 ≈ −2.1Trade deficit, slightly worse because of wages paid to US cross-border workers.
Greece−0.9 − 0.9 + 0.3 = −1.5Goods −12.3 versus services +11.4: tourism and shipping pay for almost all imported goods.
France−0.6 + 3.0 − 1.9 ≈ 0.6Investment income from abroad turns a trade deficit into a surplus.
Italy3.2 + 0.8 − 0.8 = 3.2The two income items cancel, so CA = TB; a goods surplus does the work.

US-China trade and the trade wars: bilateral versus total

  • A bilateral balance is the balance with one country; the total balance is with the whole world. After China joined the World Trade Organization (WTO) in 2001, the China share of the US goods deficit rose from about 20% (2000) to almost 50% (2015); in 2020 it was 34%.
  • The US deficit with China then fell: $280 bn (2023), $297 bn (2024), $203 bn (2025). But the total US goods deficit rose by $25 bn in 2025 to $1,241 bn. Imports simply came from elsewhere: the deficit with Vietnam grew about 350% since 2018 and with Taiwan about ninefold. This rerouting is called trade triangulation.
  • Trade war 1 (2018-2020): US tariffs (import taxes) on solar panels, washing machines, steel (25%) and aluminium (10%), and on many Chinese goods; "Phase One" deal in January 2020. Trade war 2 (2025): tariffs on Canada, Mexico and China, "Liberation Day" (2 April 2025: 10% on everyone plus higher country rates), up to 145% on China, then de-escalation. In February 2026 the US Supreme Court ruled that the law used (IEEPA) did not allow these tariffs; they were rebuilt under other laws. Average effective tariff: 2.3% (Jan. 2025) to 6.7% (Jul. 2026).
  • Result: the bilateral balance moved, the total barely did, the current account hardly noticed, and the NIIP moved mainly because of asset prices.
The lesson

The bilateral balance is a trade-policy choice. The total current account equals national saving minus investment, and tariffs do not change that. The NIIP is moved by asset prices, not by container ships.

In plain words

If a country as a whole spends more than it produces (saves less than it invests), it must import the difference from somewhere. Tariffs on one country only change where the imports come from, not how much the country borrows in total.

And worldwide: CAUS + CArest of world = 0. One country's deficit is necessarily someone else's surplus.

Andere hoofdstukken van International Monetary Relations and Policy

Test jezelf met oefenvragen