Current Account Deficit vs. Trade Deficit: What’s the Difference?

Current Account Deficit vs. Trade Deficit: An Overview

The terms “current account deficit” and “trade deficit” are often used interchangeably, but they have substantially different meanings. A nation has a trade deficit when it spends more on imports than it earns on exports.

A nation’s current account deficit is a broader measure. The trade deficit is almost always the largest component of the current account deficit, but the current account deficit includes other numbers, such as foreign aid and international investment.

It is, in fact, possible for a nation to have a current account deficit when it does not have a trade deficit, but that is highly unusual.

Current Account Deficit

A nation’s current account balance may be either a deficit or a surplus, depending on whether its total receipts from other countries are less than or greater than its total payments to other countries.

A current account deficit occurs when a country sends more money abroad than it receives from abroad. If the nation receives more money from abroad than it sends, it has a current account surplus.

The U.S. Bureau of Economic Analysis defines the current account balance as “the combined balances on trade in goods and services and income flows between U.S. residents and residents of other countries.”

The bulk of the deficit (or surplus) usually reflects the total of the receipts and payments for its trade with other nations. However, it includes dollar numbers for other factors such as:

• Foreign aid sent to the nation and received by it
• Foreign business investment in the country and investments abroad by the country’s businesses
• Foreign purchases of financial assets such as stocks and bonds, and purchases of assets abroad by the nation’s residents
• Money sent by individuals to family members abroad or received from family abroad
• Salaries and pensions that are paid to people abroad and paid to people in the home country

Current Account Deficit in the U.S. and Abroad

As of the third quarter of 2023, the U.S. had a current account deficit of $200.3 billion. As a percent of GDP, the U.S. had a deficit of 3.8% as of 2022 (latest information) and China had a surplus of 2.2% of GDP, as reported by the World Bank.

A current account deficit isn’t always a bad thing.

A country may have a deficit because it is importing large quantities of the raw materials it needs to produce goods and services it will export in the future. Its long-term strategy is to create a current account surplus, which ultimately makes it an attractive investment opportunity for foreigners.

The deficit may be problematic, though, if a country allows continued overspending on imports when it could be spending money on domestic production.

At the most basic level, a deficit means that more cash is going out than is coming in. And that money has to be made up from some other source, whether it is higher taxes or more debt.

Trade Deficit

The trade deficit or trade surplus is almost always the largest component of a country’s current account balance. It is the total value of its trade with foreign countries. It is the difference in value between exports and imports.

If it exports more than it imports, it will have a trade surplus. If it imports more than it exports, it will have a deficit. The U.S. almost always has a trade deficit, often referred to as “the trade gap.”

Trade Deficit in the U.S. and Abroad

As of Nov. 2023, the U.S. trade gap was $63.2 billion according to the Bureau of Economic Analysis. Exports were $253.7 billion while imports were $316.9 billion. In 2022, the total trade deficit was $951 billion.

The United States has been running the world’s largest trade deficit by a large margin. As of 2022, the latest data, the U.S. had a total trade deficit of $1.3 trillion whereas the country with the next largest trade deficit, the U.K., had a deficit of $294 billion.

The United States’ deficit has been growing since 2020, reaching a peak in March 2022, after which it has started to decrease.

Special Considerations

The only ways that a country can manage a trade deficit are to borrow money or raise taxes to make up for the shortfall. As the U.S. has the largest outstanding national debt in the world, this has become a significant issue within the nation, particularly in the political arena.

The U.S. national debt as of Jan. 26, 2024, is $34.1 trillion and has been growing. This has sparked contentious debates in Congress, with many members arguing for ways to lower the debt and better manage the nation’s finances while others argue that spending is necessary.

As the U.S. cannot take its debt past the set debt ceiling, there are consistent disagreements and issues in raising the debt ceiling.

This has had adverse consequences for the United States’ credit profile, with Fitch Ratings reducing the U.S. long-term credit rating from AAA to AA+ in Aug. 2023. The reason that Fitch provided was that the downgrade “reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance relative to ‘AA’ and ‘AAA’ rated peers over the last two decades that has manifested in repeated debt limit standoffs and last-minute resolutions.”

The Bottom Line

The current account and the trade account go hand in hand. The trade account is a component of the nation’s current account. The U.S. has historically imported more than it has exported, resulting in trade deficits. As the trade deficit is the largest component of the current account, which consists of total inflows and outflows, the current account has usually been in deficit as well.