Opinion
How not to correct global imbalances
By Dan Steinbock (China Daily)
Updated: 2010-01-12 07:48
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The United States has run current account deficits since the early 1980s. But the global imbalances have been an issue since 2003, as US current account deficit has soared.
In 2006 - before the onset of the US recession - the current account deficit amounted to 7 percent of US GDP. At the same time, the pressure for the appreciation of the renminbi has steadily increased. Yet, available data does not support the idea that trade surplus in China increased only in the 2000s.
In 2003, Chinese trade surplus was just $25.5 billion, that is, much smaller than the comparable figure in 1997-98 when it exceeded $40 billion. Moreover, as Chinese trade expanded very rapidly, the percentage of trade surplus in total trade was only 2.9 percent in 2003, but exceeded 12 percent in 1997-98. By 2007, Chinese trade surplus increased to 7.7 percent of total trade, but even this was far smaller than in the late 1990s.
Furthermore, if China really was the cause of the US trade deficit, the latter should be driven by China. But that's not the case. Even in 2007, when the US trade deficit peaked, China contributed about one-third of the US current account deficit, whereas Japan, Russia and oil-producing nations accounted for the rest. Yet, global imbalances have not been attributed to Japan, or to Russia, not to speak of Saudi Arabia.
Ultimately, the global crisis resulted from the laissez-faire deregulation that was launched in the United States and the UK in the early 1980s. Initially, it contributed to increasing competition, while intensifying growth in emerging economies as well. Over time, it boosted excessive leverage and risk-taking, which caused the burst of the dot-com bubble at the turn of the 2000s.
Along with the terrorist attacks of 9/11, that led to aggressive monetary policy to reduce the interest rate, while excess liquidity boosted the housing boom. At the same time, household debt soared.
In different circumstances, the dot-com bubble and the post-9/11 wars in Iraq and Afghanistan might have penalized consumption. Now both the households and the government have grown indebted, while the current account deficit has soared.
As a result of the crisis, there have been significant changes in saving and investment patterns across the world. Global imbalances have narrowed considerably but not adequately. Such imbalances are not in the long-term interest of the United States or China. But nor are drastic and disruptive corrections.
It is almost inevitable that, in the long term, the dollar will depreciate and the renminbi will appreciate. But it is vital that the path to the multipolar future will be gradual and smooth.
The author is the research director of International Business at the India, China and America Institute, an independent think tank in the US.
