Global Imbalances

Some observations on the difficult tasks of identifying and explaining such imbalances

I’ve just attended a conference on the subject of imbalances, both global and intra-Europe, where I discussed the roles of China and the US; the agenda for “Intra-European Imbalances, Global Imbalances, International Banking, and International Financial Stability” (organized by Gunther Schnabl and Ansgar Belke of the University of Leipzig, and University of Duisberg/Essen, respectively) is here.

 

The Peterson Institute yesterday held a session focusing in on imbalances and spillovers, with special reference to the IMF’s new approach, EBA, to identifying imbalances (see this post). The program is here. Joe Gagnon’s presentation critiques the lack of emphasis on the accumulation of forex reserves and other official flows.

 

As an aside, there are some quite interesting estimates of the cross-border impact of the fiscal cliff in the presentation “Navigating and Interconnected World” (among many other things).

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14 thoughts on “Global Imbalances

  1. indiana way

    identifying imbalances is not difficult in any technical sense
    surplus country governments just don’t want any attention given to their mercantilist, beggar-thy-neighbor trade policies. end of story.

  2. ReformerRay

    I also have not been able to access Chinn’s paper. But I did get enough from the titles of the papers to reinforce my long held opinion that academics are avoiding looking at global imbalances realistically.
    Global imbalances exist because nations with large trade trade surpluses expend domestic resources to create and sustain a trade surplus. Japan showed long ago that a trade surplus was a means to improve a domestic economy. Today, Germany and Japan are demonstrating anew the impact of a trade surplus on the expansion of a domestic economy.
    Coordinated action to reduce imbalances will not be embraced by Japan, China or Germany. They do not want global imbalances reduced.
    The U. S. political leadership received good advice a couple of years ago when high Chinese offficial said that it us up to the U.S. to reduce your trade deficit.
    The only effective action open to the U.S. is to reduce imports. The only way to reduce imports to the U.S. without triggering a trade war is adopt a trade policy which all nations can imitate without problems. Reduce imports from those nations that have a large trade surplus with the U.S. Currently China, Japan and Germany. Imports from all other nations will continue to be accepted according to current law.
    Ignore past traditions and beliefs. Trade deficit nations hold the key to moving towards balanced world trade. It is up to each trade deficit nation to reduce imports from those nations that are creating their trade deficits.

  3. Get Rid of the Fed

    “I also have not been able to access Chinn’s paper. But I did get enough from the titles of the papers to reinforce my long held opinion that academics are avoiding looking at global imbalances realistically.
    Global imbalances exist because nations with large trade trade surpluses expend domestic resources to create and sustain a trade surplus. Japan showed long ago that a trade surplus was a means to improve a domestic economy. Today, Germany and Japan are demonstrating anew the impact of a trade surplus on the expansion of a domestic economy.
    Coordinated action to reduce imbalances will not be embraced by Japan, China or Germany. They do not want global imbalances reduced.”
    And economists encourage more and more gov’t debt and/or private debt to “cover up” these imbalances. Those are the biggest problems with price inflation targeting/level targeting and NGDP targeting/level targeting. They basically ignore current account imbalances, gov’t debt, and private debt. The biggest problem of all is the central bank(s) credo. They want all new medium of exchange to be borrowed into existence from a bank or bank-like entity.

  4. ppcm

    Figures do not match,as an example Germany BOP as exhibited by the IMF:
    Please see “IMF elibrary balance of payment at a glance, data Germany” ,then please see “Deutsche Bundesbank Balance of payment statistics August 12th”.When Reading the figures,one may remember that Germany industrial production is revolving around 17% of a GDP of 2.5 Trillions euros.
    Noticeable the improvement of the eurozone balance of payement and the decreasing surplus in the German balance of payment (IMF Balance of payment at a glance)
    When Reading the current accounts by country of choice IMF (QEDS SDDS /QEDS country data Tables) the currencies exchanges do not match either, be it on balance of payment criteria or current accounts that are swelling.
    Few corrolaries may need further assessments:
    Influence of the assets pricing and repricings on current accounts.
    Influence of the misrepresentation of accounts on pricing and current accounts.
    A world that is interconnected and where curves fittings are prevalent.

  5. c thomson

    So Reformer Ray thinks we can cut off Germany, China and Japan – he forgot Korea – from selling us those useful high tech manufactured goods that our consumers want and replace them with the high quality items – not white powder – that come from Colombia, Egypt and Equador? Like plastic buckets?
    Or do we start making LED TVs in Youngstown, Ohio at twice the price of a Korean one? Shouldn’t take more than a couple of years to retrain the Youngstown workforce. Well, maybe a little longer than that…

  6. ReformerRay

    Reducing global imbalances will be accomplished by marginal changes, not by “cutting off” desirable imports from China, Germany or Japan. Imposing a 10% tariff on all imported goods made in each of those countries will not eliminate trade.

  7. MarkS

    From my perspective, “global imbalances” are primarily driven by the rise of Multi-National Corporations (MNCs), and the drive to structure business activities beyond the reach of the tax man. It is not coincidence that only 0.03% of corporations (1% of exporters) represent 80% of export value in the USA. Tax arbitrage and avoidance continually move assets and income to offshore havens. Simultaneously, political lobbying by MNCs and their facilitators in international investment banks, have structured taxation and tariff laws to encourage offshore production and the draining of national assets.
    Perversely, the constant press of price inflation facilitated by western central banks, continually erodes the ability of smaller businesses in those countries to remain internationally competitive in manufacturing. In the long run, the banking world will keep extending credit to any sucker willing to spend more than they earn, until the sucker’s carrying cost exceeds their income. Greece has crossed the line, how much longer can the US tread water at $1.2 Trillion/yr in Federal Deficits plus $480 Billion/yr in Current Account Deficits?…. Answer: Until some new entity with sufficient credit can supply enough currency to displace US Dollars in world trade.

  8. don

    There is not a great deal of mystery about the imbalances. China has something like $3 trillion in foreign exchange reserves. Germany was admitted to the euro at an undervalued exchange rate.
    China should be forced to stop currency interventions.
    Germany should leave the euro and re-enter. The current solution (wait for internal wages to adjust, with deflationary pressures in the debtor countries) is not a good idea.

  9. ReformerRay

    Mark – It is possible for multinationals to do all that you say without being the primary source of unbalanced trade between nations. China, Germany and Japan are the nations responsible for the bulk of the trade deficit experienced by the U.S. Those three nations have aranged their affairs so that domestic firms dominate their economy.
    0

  10. ReformerRay

    Begin with this sobering quote from my economic advisor: “Back in 2000, the United States was the uncontested prime mover in the world economy; it was the dominant source of savings and investment activity in the world, generating approximate $1.8 trillion in gross national savings, or about 25% of global gross savings. At that time China was a distant player generating round $440 billion of gross national savings”.
    “Looking at the same numbers in 2011, the U.S. has essentially spent a lost decade in terms of its competitiveness. Gross national savings in 2011 were $1.9 trillion, virtually identical to where they were in 2000 in dollar terms, but this represents only 12% of global savings. On the other hand, China’s gross national savings in 2011 is estimated at $3.7 trillion, nearly twice of that of the United States and up eightfold since 2000″.
    Which President is responsible for this result? George W. Bush was President at the beginning of this decade and Barack Obama at the end. But Bill Clinton was President in the preceding 8 years. All three were at fault only to the extent that they continued practices that extended decades in the past. They did not see the train wreck coming so they made no effort
    to revise or correct U. S. trade policy.
    Could anything have been done to avoid this result? The Chinese economy was destined to expand, given the conditions that existed in the world in 2000. But it was not destined to expand so rapidly and it was not destined to expand primarily by hollowing out the U.S.. economy.
    The U.S. could have created a different result by creating a different international trade policy in 2000, one which said that the U.S. would limit trade to those nations that would agree to balanced trade among manufacturing products. Exports and imports of manufacturing products in and out of the U.S. will be managed by the Federal government to achieve balance. This is the goal. But years of experimentation with tariffs on manufactured products produced in countries that have a trade surplus with the U.S. will be needed for trade to approximate the goal. Begin with modest tariffs (10%). Limit the nations restricted to Japan, China and Germany. See what happens with modest tariffs on the nations with the largest trade surpluses with the U.S. Increase the tariff rate and the nations involved if the new policy is judged a success. The beauty of this policy is that it can be adopted by all nations with beneficial results for the world economy,
    This proposed policy could not have been implemented in the U.S. in the year 2000. Support for a contrary policy, free trade, was near universal among economists, business leaders and politicians.
    A belief system created the decade of lost competitiveness. The heartbreaking irony of the situation is that the experts have never provided solid justification for the belief that more trade is always desirable for every nation under all conditions. No intellectually respectable argument has ever been developed to justify 33 years of a continuous trade deficit experienced by the leading economy in the world.
    to me

  11. MarkS

    Reformer Ray
    Your comment inspired a great deal of thought for me… I’ve come up with the following theory:
    Post WWII, enlightened technocrats and industrialists in the U.S. supported liberal trade policies with mercantilist Germany and Japan to buffer fear of encroaching communism from China and the USSR. US Military expenditures in defense of these countries allowed higher domestic investment in infrastructure and industrialization.
    China’s industrial rise has been expedited by similar forces. Trade liberalization started 40 years ago as a counter to Soviet influence, blossoming into a mad transfer of industrial production to China enticed by low labor, legal, tax and environmental costs, as well as the seduction of a potentially huge market. China, nobody’s fool , duplicated the mercantilist policies of Germany and Japan and added twists like domestic business partnerships that accelerated technological transfer.
    Unlike the strong nationalism and statism found in the US after WWII, recent times have been dominated by private and corporate interests more concerned with weakening government and promoting private interests. It comes as no surprise that the combination of more mercantile, financially conservative and socially organized societies are eating Uncle Sam’s lunch.

  12. ReformerRay

    MArkS speaks the truth. He has it exactly right. Fear of Russian style Communists expansion dominated U.S. foreign and trade policy after WW II.
    The U.S. Trade Deficit Review Commission (established around 1999 by act of the Congress) had an opportunity to recommend a new course of action. They failed to do so. There was no intellectual leadership willing to face reality.

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