Competitiveness and Development Programme • Volume 14 • Number 30 • 8th September 2010

Global Trade Grows, So Do Imbalances

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Global goods trade in the first half of 2010 was about 25 percent higher than the same period of the year before, and the value of worldwide merchandise trade grew during the second quarter, according to new data from the WTO secretariat. But the volume of global trade remains well below the peaks reached in mid-2008 before the global financial and economic crisis. And other data suggest that global macroeconomic imbalances are widening once again, threatening to increase tensions around trade relations.

World merchandise exports were seven percent higher in the second quarter of 2010 than in the three preceding months. They rose in June after dipping in April and May, show the WTO figures, which cover some 70 economies representing nine-tenths of global trade.

Asia’s exports and imports in the second quarter were both up by roughly 37 percent over the year before. Over the same period, exports from Africa and the Middle East were 35 percent higher, attributed by the WTO to demand in Asia and the US along with higher commodity prices.

The year-on-year figures reflect the healthy recovery in global trade following a sharp drop-off in late 2008 and early 2009. (Despite the rebound, the value of global merchandise exports remains about 15 percent lower than its mid-2008 peak.)

Trade growth from the first to the second quarter of 2010 is modest in comparison: exports from Africa and the Middle East increased by a mere one percent – as did imports.

China-US tensions grow with trade gap

But the new WTO figures, along with data from elsewhere, suggest that imbalances between large deficit and surplus economies, which had shown signs of narrowing, are growing once again. This, in turn, is reviving trade tensions, particularly between the United States and China.

Between the second quarter of 2009 and the second quarter of 2010, Chinese imports grew faster than its exports, by 44 to 41 percent, according to the WTO. But in quarter-on-quarter terms, China’s exports in grew by 23 percent, compared to only 15 percent for imports. Over the same period, the US imports grew twice as fast as its exports, at 12 to 6 percent.

In recent years, the US’s trade deficit with China has been a political lightning rod in Washington; many members of Congress blame the gap on an artificially undervalued Chinese currency, and have threatened Beijing with trade sanctions if it does not let the yuan appreciate.

China defused some of the tension surrounding its currency in late June, when it announced that it would relax the yuan’s two-year-old peg to the US dollar (see Bridges Weekly, 23 June 2010).

That announcement came on the eve of a summit of the Group of 20 leading industrialised and developing countries, and helped the Chinese government avoid intense scrutiny of the issue at the conference in Toronto. It also helped the Obama administration convince the sponsors of Congressional legislation targeting China for currency manipulation to postpone moving ahead with the bill.

Since June, however, the yuan has risen by only 0.3 percent against the dollar. Meanwhile, the US’s trade deficit has increased, in significant measure due to imports from China.

China ran a rare trade deficit in March, prompting Chinese policymakers to declare the days of large surpluses over, and with them, any need to let the yuan appreciate (see Bridges Weekly, 24 March 2010). But since then, China has resumed running trade surpluses. In July, China’s trade surplus climbed to $28.7 billion, the largest since January 2009, according to data released by the Chinese General Administration of Customs, the New York Times recently reported.

In contrast, the US trade deficit for goods and services jumped by 18 percent between May and June, reaching $49.9 billion, attributed by the US Census Bureau’s foreign trade division to greater imports of consumer goods, cars and auto parts, and capital goods. The goods trade deficit with China alone increased from $22.3 billion in May to $26.2 billion in June.

Many economists question whether a substantial appreciation in China’s currency would solve the US’s deficit; production of the sort of products the US imports from China may simply shift to neighbouring low-cost countries like Vietnam.

Nevertheless, stubbornly high unemployment in the US combined with November’s Congressional elections raise the political profile of the country’s trade deficit with China. New York Senator Chuck Schumer, a Democratic sponsor of the Congressional currency legislation, may try to push forward with the bill during hearings on it scheduled for later this month.

The currency issue figured in discussions during a visit of senior US economic and security officials to Beijing earlier this week. The US delegation included Larry Summers, one of President Barack Obama’s top economic advisers.

During the visit, Chinese officials defended their country’s trade record. Associated Press reports that Chong Quan, China’s deputy trade envoy, pledged to boost imports, but rejected suggestions that China was not doing its part to contribute to global economic development.

Arguments about how to share the burden of global economic demand are not limited to the US and China. Germany has been amassing growing trade surpluses, assisted by a euro weakened by its ties to debt-plagued Greece and Spain. Japan, too, has persistent trade surpluses. President Obama has urged surplus countries to do more to stimulate domestic consumption and imports. In Toronto, he warned that there were limits to Americans’ willingness and ability to be the world’s consumer of last resort, saying that “after years of taking on too much debt, Americans cannot – and will not – borrow and buy the world’s way to lasting prosperity.”

Michael Pettis, a finance professor at Peking University, worries that the US’ trade openness and financial flexibility mean that it will absorb the bulk of exports from elsewhere in the world, causing its trade deficit to rise until Congress finally retaliates with disruptive tariffs and import quotas.

Writing in the Financial Times, he urged world leaders to “make every effort to rebalance trade in a less disruptive way.”

“Trying to avoid sharing the cost of the necessary global adjustment is how the major economies reacted in the 1930s, and those policies are widely and correctly referred to as beggar-thy-neighbour,” Pettis wrote. “We know how that game ends.”

ICTSD reporting; “Renminbi dispute looks set to haunt Sino-US economic talks,” FINANCIAL TIMES, 4 September 2010; “China vows to boost imports, help world recovery,” ASSOCIATED PRESS, 6 September 2010; “The last chance to avoid a global trade war,” FINANCIAL TIMES, 23 August 2010; China’s Trade Surplus Climbs to $28.7 Billion, NEW YORK TIMES, 9 August 2010.

One response to “Global Trade Grows, So Do Imbalances”

Ardent Hollingsworth 9th September 2010 at 22:57
The Bretton Woods—GATT (WTO) system has always had a huge defect which was pointed out by John Maynard Keyenes. It lacked a mechanism by which to discipline countries running a chronic trade surplus. The U.S. is certainly within its rights to a slap a tariff on all Chinese goods coming into the U.S. But this unlikely to happen because U.S. businesses who have strong ties with China are pressuring Congress to leave China alone who are operating as de facto emissaries of the Chinese government.