If a trade deficit fosters borrowing to finance long-term investment or reflects rising incomes,

confidence,
and
investmentand
doesn't
hurt
employmentthen
it's
good.

Emerging markets with young populations, low savings and low debt stocks can benefit greatly if
they borrow externally to fund investments that could not be financed otherwise. If that borrowing
is invested wisely, the capital stock grows, the economy becomes more productive and, over the
long term, the current-account deficit will shrink. Indeed, as the country increases its
competitiveness, it might even run a balanced current account or a surplus.
It is really the cause of the deficit and the nature of the financing that determines whether or not
persistent trade deficits are harmful. For example, an emerging country may need to invest a lot in
physical capital, and it makes little sense for it to finance this investment with a reduction in
consumption. Instead, it must maintain its consumption at a reasonable level and borrow from
abroad, which means running a trade deficit.

The problem is low national saving. Given that national saving is low, I am not eager for the
trade deficit to disappear, because that would mean that domestic investment would need to
fall to the low level of national saving. But I do think it would be good if the trade deficit were
to disappear accompanied by an increase in national saving.