The US Takes a New Approach to Global Trade Imbalances

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An interesting article in the NY Times details an approach taken by the Obama administration to tackle China’s huge trade deficit and artificially low currency. Washington has repeatedly failed to call China a currency manipulator even though just about everyone is in agreement that the country has been suppressing its currency for years. While the new approach doesn’t directly call for China to allow the Renminbi to freely float, the result could be a gradual revision of the exchange rate while allowing China to claim it is meeting its internationally agreed objectives without bowing to external pressure.

At a meeting of finance ministers of the Group of 20 leading economies, the United States proposed that deficits or surpluses in a country’s current account ” the trade balance and some financial transactions ” should be brought under 4% of G.D.P., by 2015. The USA’s current account deficit currently stands at about 3% of GDP but a 4% +/- target would help reduce the world’s largest imbalances namely China’s surplus at 5% and Germany’s surplus at 6%. Some countries have balked at the target but China has accepted it. As the paper explains these huge surpluses are hogging demand in overseas markets that could be supplied by other countries, many of whom, like the US, are running deficits.

Now of course it’s not as simple as just telling BMW or Siemens to stop selling so many cars or industrial systems to overseas markets; that is clearly impractical. Countries would have to set macro policy to actively encourage internal consumption – for citizens to spend their money at home and hence stimulate imports to counterbalance the exports. The goal acknowledges that China also has other tools to increase spending at home, improve the lives of its people, and reduce external imbalances. It could raise wages and as the article says deploy some of its mountain of reserves to pay for long-neglected social spending on health care, education and pensions. In small ways Beijing is already beginning to do these things but with a clear focus on deploying these tools to achieve set objectives it could do very much more. We have seen how China can achieve phenomenal change via its command economy when rules are set to achieve long-term strategic aims, reducing the country’s current account below 4% could be hastened by allowing the currency to rise against the dollar, thereby stimulating imports, increasing the earning power of its citizens, promoting internal consumption and re-directing export orientated manufacturing capacity toward serving the home market.

Too simplistic? Possibly but it has the overwhelmingly attractive benefit that China can pursue such a goal without having to acknowledge external pressure to revalue, something the country has fiercely resisted to date. The greater challenge may be to pursue countries like Germany, which prides itself on having a heavily export orientated manufacturing sector, enact the necessary changes. Now wouldn’t that be a turn of events, China and the US aligned in pressuring a reluctant Germany?

–Stuart Burns

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