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Thursday, November 19, 2009

Global Imbalances and the President's Trip to China by Dr. Douglas O. Walker

It has now been more than two months since Dr. Pingfan Hong, Chief of Global Economic Monitoring of the United Nations Secretariat, visited Regent and spoke to faculty and students on the ongoing problem of huge global imbalances that threaten the stability of the world economy. He pointed out that the outsized and unsustainable trade deficits and surpluses that describe trade between the United States and China are central to this problem, and must be eliminated if there is to be a sustained recovery from the Global Financial Crisis and the past pace of world growth is to be restored. He also suggested some ways that China could contribute to reducing the imbalances by increasing its import demand and promoting higher domestic consumption within its economy. In the case of the United States, he noted that the U.S. must reduce its import demand significantly, most notably by reducing its extraordinarily large fiscal deficits.

Dr. Hong emphasized difficult adjustments on the part of both countries would be required to restructure patterns of production, consumption, employment, and trade in such as way as to establish a stable foundation for long-term growth. Because of the precarious state of the world economy these adjustments should begin immediately. A video of Dr. Hong's presentation and comments of other participants can be seen here.

President Obama is now in China and high on the agenda is the question of China-U.S. trade and progress toward reducing the large trade imbalance between the two countries. It is useful to quickly review where we are in addressing the problem outlined by Dr. Hong to see if any progress has been made.

Since the fourth quarter of 2008, both China's surpluses and U.S. deficits have been smaller than in recent years, reduced by the collapse of world trade and the improvement in the household and business saving rate in the U.S. This is consistent with reducing global imbalances and the improvement is of course welcome, if not the way it was attained. However, the Wall Street Journal reported the other day renewed strength in America's import demand and a higher trade deficit in August and September as the recession starts to wind down. This quick response by import demand to an upturn in economic activity would seem to imply the improvement is related to transitory factors such as the steep decline in U.S. economic activity due to the recession. Given its rapid reversal when conditions in the U.S. improved slightly there is little reason to believe any long-term adjustment in the pattern of U.S. trade is taking place. Similarly, the Chinese insistence on a weak-currency policy would seem to indicate that China is not taking steps needed to restructure its trade.

News reports on the President's trip to China indicate that little or no progress between the two countries has been made on the contentious issues surrounding their mutual trade. Clearly, neither side is prepared at this time to deal with the deep-rooted problems that at once define and threaten their prosperity.

The failure of both China and the U.S. to do anything significant about their trade imbalance is not surprising. For both countries very large changes are needed to create patterns of production and consumption and exports and imports that are compatible with a rapidly changing world economy. This does not mean that Dr. Hong was wrong to warn us of the consequences of global imbalances of the magnitude we have seen in recent years.

It simply means we should not be surprised if soaring U.S. trade deficits and huge Chinese trade surpluses continue to weigh on the world economy and place it in great risk of another crisis such as we are now enduring.

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