America’s eager consumers have long been the world’s buyers of first and last resort. But it seems unlikely that U.S. trade deficits will increase by the $50 billion to $100 billion a year necessary for this to continue. What happens then? Good question. A healthy trading system requires that countries be both eager exporters and importers. If nations don’t spend what they earn abroad–or if weak economies make them weak importers–then the trading system will founder. That is today’s problem, which has been masked by the huge U.S deficits.
Where will future trade expansion come from? Europe seems a doubtful candidate. With feeble economic growth, it won’t buy a lot more exports. Moreover, Europe often runs small current account surpluses, meaning that it sells more than it buys; this drains demand from the trading system. Latin America is in a similar position. Many big countries (Argentina, Brazil) are so burdened by debt that their growth is hobbled and they strive for export surpluses–earning precious dollars–to repay their international loans. As for Africa, it’s so poor that it hardly matters in global trade.
Well, what about Asia? It ought to save the global trading system, but it may do just the opposite. These countries are ferocious exporters; unfortunately, they are less enthusiastic importers. Increasingly, they seem to strive for permanent trade surpluses and hoard their excess export earnings. Consider what’s happened to their foreign exchange reserves. These reserves–a crude measure of hoarding–are the funds (mostly dollars) earned from trade surpluses and received from international investment.
Since 1996, the foreign exchange reserves of some major Asian countries have jumped from about $500 billion to more than $1.3 trillion. Japan’s have risen from $217 billion to $534 billion, China’s from $107 billion to $345 billion, Hong Kong’s from $64 billion to $116 billion, Taiwan’s from $88 billion to $182 billion, South Korea’s from $34 billion to $128 billion and Indonesia’s from $18 billion to $33 billion. These funds are typically left in safe investments, such as U.S. Treasury securities. A lot of attention has focused on China, but the problem is larger than China alone. (With the exception of those for Taiwan, the figures come from the International Monetary Fund; the latest are generally for May.)
As a result, the trading system lacks circularity: countries that sell don’t automatically buy. This is bad, very bad. The justification for free trade is that everyone ultimately benefits. Countries do what they do best. Poor countries sell inexpensive labor-intensive goods (shoes, toys, clothes) to wealthy countries and buy sophisticated knowledge-intensive goods (jets, pharmaceuticals, industrial machinery). Living standards in all countries rise. Some workers and industries may temporarily lose, but most consumers benefit and most workers are ultimately re-employed in trade-competitive industries. Countries use their export earnings to buy more imports; trade doesn’t permanently destroy jobs. Spending is circular.
If too many countries hoard, the logic of free trade collapses. Trade can become an economic depressant and job destroyer. Too many sellers chase too few buyers. Countries compete for bigger shares of stagnant markets and try to shift unemployment abroad. In the 1990s, the U.S. economic boom–and the big trade deficits–postponed these pressures. But now the boom is over, the dollar has depreciated on foreign exchange markets (making American products more competitive) and the U.S. deficit shows signs of stabilizing. In June, it dropped slightly.
A great, if silent, struggle has begun. For decades, expanding trade (now about $8 trillion annually) promoted global progress. It reduced poverty and spread prosperity. But if the trading system can’t solve its basic problem–overreliance on the U.S. market–it could foster political division and economic vulnerability for all. Trading patterns must become more balanced and sustainable. Europe needs to grow faster; Latin America needs to dig out from its debts, and Asia needs to stem its hoarding and become less dependent on export-led economic growth.
These changes might occur spontaneously. Or they might not. Japan provides a warning. Its economy hasn’t diversified away from export dependence and, despite a huge trade surplus, has stagnated. Parochial politics, economic nationalism, cultural habits and currency manipulation prevented change. If the same thing happens elsewhere, the world may be stumbling toward a future of creeping protectionism, competitive devaluations and discriminatory trade blocs. It’s a troubling vision.
