The record-breaking US current-account deficit has prompted calls from protectionists to slow the flood of imports. This response may be understandable, but it is still misguided, given that a large and growing share of the deficit simply reflects the international reach—and success—of the strongest US companies.
Research by the McKinsey Global Institute (MGI) shows that roughly one-third of today's current-account deficit results from trade with US-owned subsidiaries abroad—an automaker importing cars assembled in Mexico, for example, or a bank using call centers in India.1 These activities may add to the nation's trade imbalance, but they also create significant value for US customers, companies, and shareholders.
Trade between foreign affiliates (as offshore subsidiaries are called) and US companies and customers can, in fact, increase or decrease the current-account balance. When a US carmaker manufactures vehicles in Mexico, it sells many of them to Mexican consumers; the resulting profits appear in the current account as a positive income flow.2 In addition, these companies use technologies and components produced in the United States, thereby lifting US exports. At the same time, vehicles assembled abroad and shipped back to the United States count as imports, despite the fact that they are produced...