VoxEU has released a primer on rebalancing the global economy here, edited by Stijn Claessens, Simon J Evenett and Bernard Hoekman. For those interested in the political feasibility of rebalancing, Jeff Frieden holds forth on “The political economy of rebalancing”. The table of contents for the entire book is here.
Comments are absemt because of the length of the reading. Below is my favorite passage because it is a simple summary of the problem.
“The global macroeconomic imbalances of the past decade were the underlying
cause of the crisis that erupted late in 2007. Even if we wanted to restore
these imbalances, it is almost certain that they are no longer sustainable. The
principal item on the international economic agenda is how to rebalance the
world economy, and national economies within it. These interrelated tasks are
extraordinarily challenging, and not primarily for technical reasons. They are
challenging because they call into question established patterns of political
power and economic influence, both within countries and among countries.
The principal challenges of the next decade are two-fold, and closely related:
to manage political conflicts within countries, and to manage political conflicts
among countries”.
The economic profession can make a constructive contribution to reducing the intensity of conflicts by proposing a new way of looking at trade that focuses explicitly on the distribution of the benefits of trade among nations. What we all get from trade is the first interest of every nation. Accept reality. This new perspective will ultimately lead to dethroning of free trade in favor of equal trade as the legitimate goal for every nation.
The thtust of most of the articles in this 215 pages is the difficulties faced by the goal of rebalancing without a major shift in perspective.
I quoted above the conclusion of the article by Jeff Freiden because it provides a good summary of the problem.
I do not agree with his vision of how to correct the lack of balance.
He sees some kind of cooperative agreement among trading partners. I think that is impossible. The trade surplus countries got in that position by years of hard work to achieve that position. They did not just stumble into it. I expect them to fight tooth and nail to maintain the status quo – or as near as possible to what they had in 2005.
The U.S. did stumble into their pattern of trade deficit. It is up to the U.S. to correct their problem and to do it in a way that provides a model for all other trade deficit nations, such as Britain, to follow.
The correct solution is to substitute the goal of equal trade for free trade. Equal trade is an unattainable goal, just like free trade. But each nation that has a trade deficit can take steps to move their nation toward equal trade. Other nations do not have to agree with the U.S. goal. It is up to the U.S. to determine how large out trade deficit will be. That is a decision for the U.S. to take alone.
The good way to reduce the U.S. trade deficit is for the U.S. Congress to accept equal trade as the aim of U.S. trade policy and to pass a law which will move the U.S. in that direction.
The needed law with establish a system of tariff rates that will begin at 10% 4 months after the law is passed and that will increase by 5 percentage points each 4 months thereafter until a peak of 40% is reached. These rates will apply to all imports into the U.S. that are manufactured in the countries of China, Japan, Germany, Canada and Mexico. These countries account for 2/3rd. of the U.S. trade deficit in 2007 -2008. All other imports will continue to be accepted using current laws.
This system will slowly and gradually reduce the U.S. trade defict by handicapping those countries that are most responsible for the current trade deficit. Producers located in the U.S. will continue to face fierce competition from imports from all other nations. But this system will warn all nations that the U.S. aims to cease being the patsy. More than 3 years will be required to see what this system produces. Any time during this period, the U.S. Congress can modify the system by passing a new law. Possibly Mexico will cease having a trade surplus with the U.S. and will be removed from this system.
This proposal is a radical change in philosophy and legalities, requring rejection or modification of current laws related to foreign trade. The seriousness of the problem requires radical change.
But the slow growth in tariffs means that adjustment will take place slowly.
The current recession has reduced the U.S. goods trade deficit to around 32% of goods imported. Without some such law as outlined above, this ratio will climb back toward, but probably never achieve, the level of .46 achieved in 2005. My goal is to reduce this ratio down to .23, the level that was experienced in the U.S. in 1997.
The U.S. economy can function very effectively with a goods trade deficit equal to 23% of goods imported.