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The Issue of Global Trade Imbalances in the US and China Research Paper

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Updated: Aug 20th, 2019


Globally, the mid 2000 experienced an economic performance boom. Things then turned for the worst after the financial crisis that happened in August 2007.

During the boom period, the aggregate growth of the economy was robust; the rate of inflation was low; the international trade, in reference to the flows of finance, expanded; the countries that in a development and emergence stage experienced a tremendous rate of progress and an evident crises absence (Willem & Hanjiang 400).

However, three trends, which were increasingly unsustainable with the passage of time, resulted to the underpinning of the strong performance of the global economy. The first trend involved the real estate values. As such, in many countries, they were rising with an incredible high rate. This indeed included the larges economy in the world, that is, United States.

The second trend was; in several countries including the United States, the deficit in their current accounts were not only rising but also running high at the same time (Willem & Hanjiang 402). Thirdly, in many economic sectors across the world, there was an extra ordinary build up of leverage.

The most notable major leverage build up was among the consumers in; financial institutions across the world, the United States and in the Great Britain. According some financial analysts, the global trade imbalances indeed was not the cause of bubbles related to housing neither was it the cause of leverage (Willem, & Hanjiang 405).

In fact, the condition was important in a critical way as a codetermining. Beside the U.S being the largest economy in the world, it hosted the highest rate of privatised ownership of homes as compared to all other countries in the world (Willem & Hanjiang 410).

Thesis Statement

This research paper will aim at assessing the issue of global trade imbalances in regard to; World policy Makers Reaction, Global trade imbalances threatening the free trade, the question of what is trade imbalance, if it is possible that Global trade imbalances be sustained and what measures could be taken to reduce the global trade imbalances.


Even today, the interconnection between financial meltdown in the world and the global trade imbalances still remain to be a great controversy. Some research papers argue that external trade imbalances indeed do not have a significant contribution to world crisis. In addition, they claim that the crises are caused by the failures of trade regulatory as well as errors in trade policies.

On the other hand, others believe that it is the mechanisms incorporated in the world trade that play a role, which can be said to be primary in nature, in causing the financial collapse (Morris & Nicholas 106).

For instance, the U.S Treasury Secretary indicated that the tremendous savings by the Chinese, the countries exporting oil as well as other countries with surplus are the causes of the depressed world real rates of interest, which in turn result to investors, make scrambled efforts towards attainment of yield as well as the risk of under price (Morris & Nicholas 109).

World policy Makers Reaction to Growing Imbalances

In the period between late 1980s and late 1990s, the deficit account of the U.S fluctuated such that it went to extreme of below two percent of the gross domestic product. In the year 1998, Asia experienced a severe financial crisis and there followed a full swing backwash.

As such, the deficit therefore hit 2.4 percent of the gross domestic product. By 2003, the deficit had risen to 4.8 percent of the G.D.P. In 2003, the deficit accounts of the U.S reflected a lowly national savings and this was as a result high rate of investments in the late 1990s (Morris & Nicholas 116).

In the year 2006, a strategy was put in place by the U.S treasury whereby they had to borrow from external sources so that the deficit could rise to 6 percent of the G.D.P. Later, it saw a gradual fall in the late 2000, to be specific 2007 to 2008. The deficit then started falling in a more notable and abruptly after 2008.

To try rectifying this financial crisis associated with global trade imbalance, several official discussions were triggered. The predominant topic of these discussions was the risk imminent from the large global trade imbalances (Morris & Nicholas 122).

One of the most notable discussions was the one held by G7. This discussion was aimed at pressurizing both Japan as well as China to reduce their intervention in purchase of the United States dollar. During a meeting involving the IMF and G7 held in 2003 in Dubai, the U.S made a pledge that it would take steps in promoting its national savings.

Also in that meeting, Europe signed a commitment that it would raise the continental productivity. Thereafter, early 2004 saw the finance ministers in G7 as well as the governors of the central banks make an assertion that, reliable fiscal policies concerning the medium term would be established and as such, they would be the key aspects to address the deficits in the current accounts globally (Clyde & Claire 61).

This assertion was in support of structural policies aimed towards enhancement of growth.

The responses from the federal reserve of the U.S were indeed presented in sanguine terms. Alan Greenspan was for the opinion that the deficit in the U.S current account could not widen for a long time.

He further said that there was a probability that the increased flexibility in regard to the American economy would lead to any facilitation and as such, it would not cause a noticeable consequence in regard to the national economic activity.

A famous Sandridge lecture that was presented on March 10th of 2005 by a scholar known as Ben Bernanke indicated that the cause of the deficit experienced by the U.S were primary external to the United States. He also argued that the primary external to the United States in turn caused the deficit curves (Morris & Nicholas 106).

Towards understanding the forces that drive the global trade imbalances, which were increasingly destabilizing and which commenced in 2004, the first step is to look back to the period that followed the crisis that befell the crisis. However, as the paper will infer, the Asian crisis aftermath are just part of the underlying story.

Global trade imbalances threaten free trade

When the developed countries around the world tend to fall into recession, there is always likelihood that they will threaten the protectionism outbreak. In contrast, of what happened in the year 2008, governments all over the world tend to have few economic downturn combative tools. As such, it raises the probability of the global economy resulting to a slump.

If this happens, then the most likely thing that is bound to happen is pressure build up (Clyde & Claire 64). The country that reacts first towards erection of barriers to trade can be said to take the damage of the trading system blame.

However, the countries that tend to skew the economic aspects of; policies guiding the exchange, systems of tax as well as the industrial structures in an effort towards efforts to gaining an advantage in exports become the real villains. The underlying irony becomes evident and as such, there are those countries that tend to be more dependent on the free trade.

These countries produce in surplus such that their productions exceed the consumption. These countries are regarded as the biggest obstacle that limit or make global economy recovery impossible. For it to be realized, these countries ought to deviate from the practiced course before it becomes too late.

If not, then it is likely that that country will be in a continued suffering if they implement plans to put up the trade barriers but, in the real sense, the economies that produce surplus will be the most affected and as such, they will tend to suffer the most (Clyde & Claire 66).

Governments that produce in surplus often tend to exhort their current account deficits in an effort towards paying down of the debt entailed. Furthermore, they save massively more than what they were saving before and encourage citizens to live within the able means.

However, the most important problem to address is the one facing the economy globally and as such; it is the lack of aggregate demand, which has gone to acute extremes. Indeed, the world is usually awash with the amounts of savings, but, the investment opportunities that can be said to be profitable are washed away and their realization is not forthcoming as long as the situation remains the same.

In turn, this tends to reflect the weakness in regard to a country’s consumption. As such, the solution can never be more savings from the citizens of a country. If they are encouraged to do so, it will result into a disastrous issue for it will cause a further depression of the consumption and therefore, more investments. These increased investments are what cause the issue (Clyde & Claire 69).

Precisely, it will aggravate the problems associated by the fiscal aspects of the economy. If there were an urge in those countries experiencing tremendous deficits in their current accounts then those countries producing surplus are forced to save less while spending more.

The U.S, the U.K and countries within the euro zone are currently experiencing domestic demand weaknesses and therefore, hit the global demand in a harsh way. This situation is insolvable as there is no measure put in place to offset the situation. Three countries, which includes; Germany, China and Japan, are the most affected by a huge amount of surpluses.

As such, in regard to the recent times, they are found to show no commitment in putting up measures to ensure that contractions in demand are offset. In respect to this ignorance, risks arise. If the countries around the world wish to get a share in the benefits brought about by the international trade, it is necessary that measures aimed at the unwinding of the imbalances in the global trade were put in place (Jaime & John 838).

What are trade imbalances?

A person needs to understand the definition of the term trade imbalances in order to understand the whole context entailed. In reference to this situation, it can be viewed as reflecting an economy whereby production exceeds the spending. Regarding the countries the produce in surplus, the amount of income got exceeds the amount of spending.

Consequently, they opt to lend the difference to those countries exhibiting less income as compared to the spending. This therefore, results into the accumulation of the international assets. In reference to this aspect, the countries that an experience deficit in regards to their current accounts tends to go on the reverse of the situation (Jaime & John 841).

Reflecting this situation, the countries are forced to spend more than their overall income. Still, they result to borrowing from economies experiencing surpluses. They do this to offset the difference existing between the overall spending and overall income.

During this process, international debts or liabilities tends to accumulate. Economy growth established by the exports in regards to the countries with surplus result in being dependent on economies, which grow out of debts. As such, it is not possible that all the countries across the world will experience surpluses or run deficits in their current accounts.

Is it possible that Global trade imbalances be sustained?

The imbalances in trade globally as well as the capital flows experienced between countries do not pose as a problem. For those societies, which are fast ageing and wealthy usually experience an excess in their savings. In regard to these societies, it advisable that one invests these in countries where, what is saved domestically is not adequate to meet the needs of investment.

Looking back at the old times, this can be said to typically mean investment of money in those markets that are emerging in a rapid way. Trade imbalances are usually sustainable if, the deficits in the current accounts of any country maintain a modest balance and that the corresponding inflows of capital are invested by the governments (Jaime & John 845).

However, the contemporary world imbalances have taken a different perspective as compared to the older imbalances. First, they encompass a bigger scope. The most notable imbalances are those between the U.S and China. Still poor, China is experiencing trade surpluses, which are massive with the U.S.

Other trade imbalances exist between those countries that entail similar levels are broad in nature in regard to the economic development. The best example is the trade imbalances between the member countries of the euro zone and more specifically between Japan and the U.S.

With respect to this scale as well as nature, the trade imbalances have not yet benign. As such, they first result to the destabilization of the flows of capital between several economies. For instance, 2007 saw the global crisis in finance. The subsequent crisis in the euro zone region was said to consequent from the flows of capital between several countries (Jaime & John 848).

The problem was then amplified by the over leverage banks. However, the underlying cause was in regard to the outflows of the capital of the regions where people, at that time, were saving hugely hoping to get high returns.

Instead of booting their productivity, the U.S and the U.K as well as the member countries of the euro zone enticed capital inflows, whose size was large, showed a struggle in trying to find uses that were productive in regard to these countries. As such, these inflows resulted in pumping up of the prices of the assets and thereby encouraging the borrowing of the household.

The imbalances in the international trade passed the test of time in respect to both crises. However, the contemporary trade is once again developing an imbalance resulting from the trade level that is high running. As such, this becomes unsustainable (Jaime & John 851).

The situation being experienced currently is not attributable to excess demand in respect to the countries with deficits unlike in the case of financial case run up. Rather, it can be argued that the imbalance is taking effect against a stagnation backdrop as well as standards of living, which are in a continuous fall with respect to these economies.

Both household s as well as organizations within the countries experiencing deficits tends to save hugely. Irrespective of this, the declines of offsetting in the private sector in surplus countries have not been felt or are absence. Going against the backdrop in the global economy, deficits in the current accounts becomes the cause of the economic activity dragging because they tend to cause a drain on both employment and the demand.

Consequently, governments are mandated to fill the gap created by ensuring that big fiscal deficits are run. Surplus countries mostly depend on the external demand. These external demands implicitly depended on the fiscal policies that are unsustainable in the countries with deficits in their current accounts.

How can global imbalances reduced?

While Deficit countries require a higher net savings coupled with a higher net exports, countries with surpluses need a combination of lower net savings and a lower rate of net exports. Countries with deficits are required to ensure that the domestic savings as well as the surpluses exceed the amount of consumption (Morris & Nicholas 126).

Countries experiencing both deficits as well as surpluses are continuously changing their structures and as such, it is a wise decision, as it will ensure that correct adjustments are made. In Germany and Japan, expenditure exceeds outputs. Therefore, these two countries result in coming up with measures aimed at reversing the declining salaries and wages.

As such, only the decline concerning the salaries and wages that are proportional to the aggregate income are considered. Consequently, consumption of a country is boosted thus encouraging more investments and in the long run, the excess savings in the corporate sector are lowered. China could come up with strategies to ensure that excess savings are discouraged.

As such, it could be done by reducing the subsidies considering the corporate sector, which holds large amounts of financial resources. In addition, the authorities involved could come up with ideas aimed at improving the Chinese social safety net and if this is done, it will see lowered excess saving, whose purpose was to cater for precautionary aspects (Morris & Nicholas 135).

However, it should be put in mind that the benefits of such adjustments are not forthcoming and also that time to make such decisions is limited. In order to ensure that rapid adjustments are in effect, it is necessary that relative prices shift. Today, countries running in deficits are usually debt ridden and therefore, it is necessary that measures are put in place to rebalance the international trade.

This should be done by combining nominal movements observable in rates of exchange as well as the high running inflation in surplus economies (Morris & Nicholas 145). At times in the U.S, the rates go so low but curbed by the quantitative easing Measures. However, the countries with currencies associated with the U.S dollar feel the effect of the high interest rate such that inflation builds up in their economies.

The best example is the Chinese currency. There is only a little option for the U.S, as it only has to continue ensuring that dollars are pumped into its financial systems. This is done to ensure that the economy drag is compensated and as such, some of the finances will continuously leak into China.

Concerned with the high rising inflation, the authorities in china are currently assuming huge steps to ensure that the Chinese economy cramps down the amount that the banks, which are owned by the state, can indeed lend out. In euro zone, what could easily damage the adjustments would be high rate of inflation in Germany.

However, there is a limited showcasing for this. If in any case there was, then the European central bank was bound to raise the rates of interests (Willem & Hanjiang 415).

Movements in rates of exchange, which are nominal, can lead to changes associated with the relative prices. The best example is whereby; the Chinese government would tend to facilitate measures that would see the renminbi rise against the dollar.

Also, Germany would walk out of the euro zone and instead reintroduce the D-mark. The D-mark would subsequently sharply appreciate in terms of value. Movements shown by the nominal rates of interests can be said to offer the least route to which rebalancing of the global trade is damaged.

As such, deflation would be avoided in the countries experiencing deficits in their current accounts or inflation in the countries running surpluses (Willem & Hanjiang 426).

There is a potential impact in reference to the Chinese currency and due to this, the Chinese treasury personnel develops an aspect of schizophrenia. On the other hand, the Chinese treasury remain upbeat and as such, it describes it as unreasonable.

The treasury asserts that, no difference will be made since deficits in the current accounts of countries with commanding economies reflect insufficiency is savings of the less viable economies. On the other hand, the Chinese Treasury asserts that the much stronger Chinese currency would not only have an adverse effect to the country’s economy but also to the international economic growth.

In short, there is dependence pattern shown as it depends on other countries that runs debt. However, at the same time, the Chinese government also condemns these countries for taking this course of an action. The movements portrayed by the nominal rates of interests may also consider being mechanisms adopted by the Germans to cut the trade surplus (Willem & Hanjiang 442).

Consequently, this would open up a way required to ensure a rebalance of the German economy. However, this led to imposition of economic as well as the political costs across European countries.

The German and The Chinese economies are the most notable among the economies with surpluses and as such, they tend to warn of the impending risk related to protectionism (Willem & Hanjiang 400). In reference to these countries, there is a failure to establish the connections within the structures of their economies. Still, they are usually unable to identify other economies having deficits in their current accounts.


From this analysis, it is clearly stated that global trade imbalance, which is still unfolding, can be regarded as a twist that describes the global crisis in economies. As such, the US and China are the particular centres of attention.

In addition, it is evident that the US can be regarded as having a huge trade and current account deficit. The entire blame usually falls on China. The contemporary global trade reality is a strange aspect and is not reflected by this tale (Clyde & Claire 71).

On the other hand, Global imbalances of trade have never been a concealed notion in regard to the manner in which the corporation between countries all over the world has evolved their operations since four decades ago to date.

The contemporary businesses entail networking of high calibre among themselves and as such, their system of production regularly facilitates the rise of imbalances in trade among countries at any time. To cap it all, it is a fact that, the nation is no longer the entity that can be considered core to the economy (Clyde & Claire 69).

Works Cited

Clyde, Gary, & Brunel, Claire. The US Congress and the Chinese Renminbi. Washington, D.C: The Peterson Institute for International Economics, 2008. Print

Jaime, Marquez & Schindler, John. “Exchange Rate effects on China’s Trade.” Review of International Economic15:5 (2007): 837-853. Print.

Morris, Goldstein, & Lardy, Nicholas. China’s Exchange Rate Policy: An Overview of Some Key Issues. Washington, D.C: The Peterson Institute for International Economics, 2008. Print.

Morris, Goldstein, & Lardy, Nicholas. Debating China’s Exchange Rate Policy. Washington, D.C: The Peterson Institute for International Economics, 2008. Print

Willem, Thorbecke & Zhang, Hanjiang. “The Effect of Exchange Rate Changes on China’s Labour-Intensive Manufacturing Exports.” Pacific Economic Review 14: 3 (2009): 398-409. Print.

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