The word "global imbalance" sounds ominous. What does it refer to? Let's start by thinking "locally," as in an economy consisting of you and me. Suppose we both work producing a good that each of us desire. From my perspective, any goods you ship to me are "imports." From your perspective, the goods shipped to me constitute "exports." If you export more than you import--so that your net exports are positive--you are running a trade surplus and I am running a corresponding trade deficit. This is the definition of "imbalanced" trade.
There is the question of how goods are paid for and how any imbalance is financed. Suppose we live in a common currency area. One possibility is that is that we pay for our shipments fully with money. At the end of the day, your trade surplus implies that you acquired more money from me than I acquired from you. Putting things this way leads us to question the notion of "imbalanced" trade. Sure, I acquired more goods from you--but you acquired more money from me in exchange. It all balances out, doesn't it?
Yes, it does. But it's still true that you exported more goods than you imported. And that extra money you acquired...what do you plan to do with it? Sit on it forever? (Actually, I explore this possibility here.) More likely than not, you are planning to spend it one day. When that day comes, I will be induced to sell you more goods than I buy from you. It will then be my turn to run a trade surplus--an act that renders trade "balanced" in the long-run.
Nothing fundamental changes in the story above if my trade deficit is instead financed by me paying you with a private or government debt instrument, or by me issuing you a personal IOU.
But what if the pattern of trade just described persists? What if you just keep sending me more goods than I send you? Then you are running a persistent trade surplus and I am running a persistent trade deficit. You are acquiring more money and securities, while I am depleting my money and possibly issuing debt.
Well, that's right...but so what? Maybe I am young and you are middle-aged: my growth prospects look great and yours appear diminished. I am a vibrant emerging economy and you are an advanced mature economy. Maybe it makes sense for the mature slow-growing economy to lend goods (especially capital goods) to the fast-growing economy. Indeed, Kollman et. al. (2015, pg. 53) estimate that strong growth from emerging economies contributed significantly to the German trade surplus, especially in the 2001-08 period. (Labor market reforms and an increased private saving rate are estimated to have had a larger impact since 2008.)
If we abstract from credit risk--the possibility that I or some other emerging economy may falter in some manner and fail to repay, then a persistent trade imbalance looks like an all-around good thing--something to be welcomed, not discouraged. And even if debtors do fail to repay, so what? Creditors presumably enter into lending arrangements knowing there is a risk of default. (Things become more complicated when we add elements like governments prone to bail out creditors, and creditors that become overzealous in their desire to make collections. But I'll leave this story for another day.)
So what is the problem with Germany's trade surplus? Let's say you're Germany and I'm a country in the periphery--e.g., one of the so-called PIGS. Both you and I are wobbled by the 2008 financial crisis, but me (a debtor) relatively more so than you (a creditor). Suppose, for example, my growth prospects are suddenly diminished--I'm looking more like the mature slower-growth you lately.
Since our growth prospects are now more aligned, there's not much of a rationale for you to run trade surpluses and for me to run trade deficits--at least, not with each other. What this means is that you should no longer work so hard to make goods for my market. And because I now borrow fewer goods from you, I'll have to work a little harder myself to make up the difference. Except that you go and spoil everything by wanting to remain super busy. So you continue to work hard to export goods to me. And because my market is flooded with your goods, there is no real opportunity (or maybe even desire) for me to work harder--it's tough to compete with you. Your trade surplus translates into a lack of demand in the periphery. Why don't you use your surplus to build yourself a bridge, or something? That'll be good for you and it'll be good for me.
That's the Bernanke point of view in a nutshell. I don't think it's entirely wrong, but I do have a problem with the story. Recall where I wrote "there's not much of a rationale for you to run trade surpluses and for me to run trade deficits, at least not with each other?" Well, that's pretty much what happened--with some delay and to an approximation--between Germany and the rest of the EMU. That is, while Germany continued to run trade surpluses in the post 2008 period, these surpluses were not made at the "expense" of other EMU countries--see the following figure.
Germany's trade surplus is presently around 200B EUR. But its trade surplus with the rest of the EMU is only 30B EUR, which is only about 1% of German GDP. This is down from a peak of about 100B EUR in 2007. Here's another way of looking at it:
So given that Germany's trade surplus with the rest of the EMU is greatly diminished, maybe it's not the problem Bernanke thinks it is. (Whether the earlier surpluses are presently a problem is a different matter of course.)
I'm more inclined these days not to view trade imbalances as intrinsically desirable or undesirable in of themselves. If they are associated with a problem, I think they're more likely symptomatic than causal. To me, it makes sense that a mature economy like Germany should help finance growth in emerging economies. And should economic weakness in the periphery lead to trade becoming more balanced, this is no reason to cheer. After all, balanced trade is also an outcome associated with financial autarky.
Adopting this view does not preclude recommending some of the policies that Bernanke advocates. If the present low yields on safe assets like U.S. treasury debt and the German bund are the byproduct of malfunctioning financial markets leading to a "safe-asset shortage," then a wide class of theories suggest the potential benefits of a debt-financed expansionary fiscal policy (e.g., see here) and not necessarily because such policies stimulate "aggregate demand" (e.g., see here).
Whether additions to the public debt are used to finance public infrastructure spending, purchases of private securities, tax cuts, or something else, is something policymakers must weigh. But these decisions are likely not as important as just "getting the debt out there." The added supply is needed to prevent the seemingly insatiable private demand for the product from driving yields to zero (and lower). As the evidence suggests, in very low yield environments, excess demand for government debt is deflationary. And unexpectedly low inflation is not the tonic that economic theory prescribes for indebted countries struggling to recover from a severe recession.
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PS. Bernanke also suggests Germany's trade surplus would have been lower if Germany had its own currency, which would presumably now be stronger than the euro against other currencies. But take a look at Switzerland, where the trade balance has grown in the face of a first stable, then strengthening, Swiss franc.
Hong Kong solution to balance of payments problems was not to collect any statistics on them prior to 1997.
ReplyDeleteJohn Cowperthwaite, Hong Kong's famous financial secretary in the 1960s refused to collect economic statistics on the grounds that he might be expected them to do something about them.
His advice to any developing country was to abolish its office of National statistics as the first step to removing barriers to economic development.
Statistics are the eyes and ears of regulators, bureaucrats, meddling politicians and worrywarts
The EMU trade balance is massively distorted by the Netherlands. A large volume of Germany's global (non EMU) imports come through the Dutch tollgate and appear in the stats as EMU imports to Germany when they are no such thing. This mislabelling deflates the eurozone trade imbalances and inflates the extra EMU imbalances. If you want to know how Germany's surplus has declined with the Southern rim (and France) you have to look at individual the individual trade balances. You will find that Germany is still extracting big surpluses from this region and that Bernanke is right on the money....
ReplyDeleteWhile what you say about the Netherlands is interesting, is there any reason to believe that this has changed in the past 10 years? Is this what has caused the divergence I report in my last graph?
DeleteI thought it was pretty much accepted as fact and well-established that stronger currencies hurt exports and weaker currencies help exports.
ReplyDeleteYou're going to have to do more than show one chart about Switzerland to challenge that consensus.
Bernanke: "Second, the German trade surplus is further increased by policies (tight fiscal policies, for example) that suppress the country’s domestic spending, including spending on imports."
Suppressing domestic spending should be viewed as an unfair trade practice - and unfair to domestic workers - even if it isn't. But as Dean Baker has pointed out, the U.S. doesn't need Germany's permission to act to counter these policies. We can act unilaterally as we did with Iraq.
So you want me to accept what you think as opposed to what I see in the data? :)
DeleteThe notion that *persistent* trade imbalances are the consequence of distorted relative prices seems strange to me. The trade balance is essentially an act of borrowing or lending. If German labor suddenly becomes cheaper, I may want to import more of it, but why would the Germans want to lend it to me year after year?
Umm, the right hand scale is labelled CHF/EUR, so the direction of the line suggests the Swiss Franc is weakening over this time, not strengthening. Is it mislabeled?
ReplyDeleteI am prone to mislabeling things, but I don't think so in this case. I read CHF/EUR as the number of francs it takes to buy one euro. The graph shows that it now takes fewer francs to purchase one euro--that is, the franc has appreciated in value. No?
DeleteSorry, my mistake.
ReplyDeleteAh, I should read ahead before I answer. No problem!
DeleteDavid
ReplyDeleteIf I may add something to the issue “Swiss C/A surplus and CHF strength” with a reference to an explanation of the SNB itself.
ad) Germany:
If a country’s CA-surplus is primarily determined by its trade account in goods, then we might expect an appreciation to result in a smaller surplus via lower exports and higher imports.
The underlying assumption in many economic models is that the CA adjustment comes about primarily through the trade-in-goods components.
Switzerland is different.
The Swiss CA-surplus is not a reflection of CHF weakness.
It is closely correlated much more with external developments in real economy than with exchange rates.
Its trade account balance in goods represents only a small fraction of the large CA-surplus.
Switzerland’s CA is not being driven by the trade balance in goods.
The large CA-surplus is mainly attributable to two components:
1) investment income and 2) services.
Switzerland’s CA has been recording surpluses since 1960.
I'll have to look at Switzerland more closely. It also has a large trade in precious metals, which I chose not to include in the NX data I reported (would not have changed conclusions). But I did not look at the CA and how it compares to NX. In any case, it was just an example to make people think about how exchange rates are correlated with NX. Evidently, not in the way many people think in the case of Switzerland.
DeleteYes, David,
DeleteWe call it “mechanting” in Switzerland,
It refers to trade, denominated primarily that does not cross the domestic border
The talk is about the relocation of commodity houses to Switzerland
Cross-border financial services and “merchanting” both activities are primarily driven by (1) international financial markets and global demand for raw materials and (2) are not sensitive to movements in CHF.
Over the past 5 years, merchanting has accounted for almost one-third of the CA-surplus.
Bottom line:
Switzerland’s CA-surplus did not arise because the CHF was too weak.
The real exchange rate does not play a decisive role: structural factors are responsible for surplus.
David,
ReplyDeleteI think the issue with Eurozone periphery countries like Greece or Spain is that access to German or French funding was too loose, leading to overborrowing, This may or may not show up well in aggregate current account surpluses due to all the ways in which international financial transactions are intermediated these days,
Neoclassical economic theory would suggest the most mature and most advanced economies like Germany should be running current account surplues, financing emerging markets and poorer EU countries with more catch-up prospects (which may have included Greece in early 2000's). But then we need to explain why the US has a persistent current account deficit despite being even more economically developed than Germany. In short, the US is the oddity in some sense and not Germany (and China as well-but for that there's some good analysis related to transition dynamics from communism to capitalism with financing constraints),
To explain the US CA deficit, I appeal to the "asset shortage hypothesis" here:
Deletehttp://andolfatto.blogspot.ca/2010/08/global-imbalances-good-for-world.html
"I'm more inclined these days not to view trade imbalances as intrinsically desirable or undesirable in of themselves. If they are associated with a problem, I think they're more likely symptomatic than causal."
ReplyDeleteI agree with your analysis up to this point, but now you begin to solve a problem (as you continue to write). I agree that the trade imbalance is symptomatic but symptomatic of what? I think that your conclusion is 'symptomatic of lack of peripheral growth'.
I think we can look at EU member Greece for a case study. Greece seems to have internal economic conditions that result in a willingness to agree to external debt on a governmental level. This willingness of government to make external debt obligations and then give citizens increased ability to purchase externally has led to a financial crisis point. Greece has a financial import-export imbalance that Greece is willing to continue but creditors are unwilling to extend unconditionally. I will not extend this comment to explore why this difference of opinion might exist other than to say that, no matter what the future choices are, both parties have winners and losers within their respective economies.
David,
ReplyDeleteYou can't abstract from credit risk or simply assume creditors are always rational. That is part of what got us into problems in Asia in the late 90s and then around the world not quite a decade ago. It also doesn't do to use the Swiss situation to suggest that currency doesn't matter. It is not the only variable, but if Germany was on the D-mark trade balances might have adjusted. If you want to gain insight into why imbalances matter and how they can occur, Michael Pettis writes on it frequently, particularly, but not exclusively, in context of China. http://blog.mpettis.com/