In its latest, from April, the IMF does a long study under the premise that US external imbalances are ... an "episode".
Free trade orthodoxers have only this much left, perhaps, to justify what Larry Summers calls, on the CRose Show, no alternative to "openness".
At least it is a tacit admission that there are potentially serious problems with how free trade is working out, especially with China, so far. Not that 'trade-equity' should be abandoned as a goal wholesale, BUT ...
IMF HONEST ENOUGH TO SAY IT'S THE B.O.T.
Apart from all the nuances, the combined troubles can be summed up in the key statistic, balance on trade, recognizing that the recent stability in net foreign income as a percentage of GDP has largely been due to unsustainable changes in portfolio valuations that are favorable to the USA (of course, the Chinese are aware that their assets are underperforming, as evidenced by the recent purchase of equity stakes in Barclays PLC. In this the Saudis predate them by decades...).
Money quote, from Chapter 3:
In sum, while international financial integration [free trade] allows for a diversification of risk, with balance sheet effects [valuation of net investment positions or capital "stocks"] cushioning external adjustments [changes in terms of trade or trade "flows"], it does not provide a permanent flow of "free lunches."
Changes in asset prices and returns can generate large valuation effects on a year-to-year basis, but would likely play a more modest role over a longer period. Hence, in a debtor country running a large trade deficit [the USA], a correction in the trade balance is eventually inevitable to ensure external sustainability.
I'm not sure there is a problem "gifting" prosperity to the world. It's just not convincing that the trade accounts are the best way to do it.
ABOUT THAT LOOK BACK IN TIME
The IMF's idea that the 'way out' of episodes is to go into slowdown, depreciate your currency, and export your way back to balance is ... the old recipe for doing things that was meant to be forestalled, in part, by such mechanisms as the ERM, in its day. Could the US do it? Not in the mid-term, given how likely it would be that those buying our exports would go into a slowdown at the same time. By the time enough 'de-coupling' occurs, 'slowdown' starts to look far more like 'sharp realignment', and who knows how bad the external position would get by then.
WILL EXCHANGE RATE OVERSHOOT HELP US?
I cannot find current real-effective exchange rates for China* on the web (for now). But for those who think it all will be solved by depreciation, is it really sensible to expect such depreciation far beyond PPP, without that creating its own problems? Do we just accept those problems as a "cost of doing trade"?
HIDDEN, SPRING-LOADED POLITICAL COSTS?
Last, as Summers points out, it is possible that high returns to capital in places like China are exacerbating global, private income distribution inequalities, potentially undermining politically the gains that are made from increased employment and the associated benefits of economic development (net of environmental costs). To this, many free trade orthodoxers are silent ...
The idea that the USA have the capability to manage trade the way Summers suggests seems out of reach because it is out of character. We cannot even get our State Department and our CIA to function for the making of war, yet we are supposed to have a 'sustained, intense trade engagement'? Perhaps, I'm not optimistic enough ...
*from the Cleveland Fed, Feb 2005
US Trade Misery Index - Trade in Goods Only, 2006
(misery index is % of total trade X % of total deficit, scaled)
| Country | Balance on Goods Trade | Rank | Percent of B.O.T. | Misery Index | Rank | Cumulative |
| Total, All Countries | -818.10 | --- | --- | --- | ||
| Total, Top 15 Countries | -613.90 | --- | --- | --- | ||
| China | -232.6 | 1 | 28% | 47% | 1 | 47% |
| Canada | -72.8 | 3 | 9% | 23% | 2 | 69% |
| Mexico | -64.1 | 4 | 8% | 12% | 3 | 82% |
| Japan | -88.5 | 2 | 11% | 11% | 4 | 93% |
| Germany | -47.8 | 5 | 6% | 4% | 5 | 96% |
| Venezuela | -28.2 | 6 | 3% | 1% | 6 | 97% |
| Malaysia | -23.9 | 7 | 3% | 1% | 7 | 98% |
| Korea, South | -13.3 | 10 | 2% | 1% | 8 | 98% |
| Italy | -20.1 | 8 | 2% | 1% | 9 | 99% |
| Taiwan | -15.2 | 9 | 2% | 1% | 10 | 99% |
| United Kingdom | -8 | 12 | 1% | 0% | 11 | 100% |
| France | -12.9 | 11 | 2% | 0% | 12 | 100% |
| Brazil | -7.2 | 13 | 1% | 0% | 13 | 101% |
| Singapore | 6.9 | 14 | -1% | 0% | 14 | 100% |
| Netherlands | 13.8 | 15 | -2% | 0% | 15 | 100% |
| Table 5. | ||||||
| The Largest U.S. Trade Deficits | ||||||
| | ||||||
| Country | U.S. Trade Deficit in 2002 in Billions of Dollars | U.S. Trade Deficit from January to July 2003 in Billions of Dollars | U.S. Trade Deficit in 2002 as a Percentage of Total Trade Deficits | |||
| | ||||||
| China | 111.4 | 70.9 | 21.9 | |||
| European Union | 88.4 | 57.2 | 17.4 | |||
| Japan | 73.2 | 39.9 | 14.4 | |||
| Canada | 53.2 | 33.1 | 10.4 | |||
| Mexico | 38.6 | 25.2 | 7.6 | |||
| Taiwan | 15.1 | 9.2 | 3.0 | |||
| Malaysia | 14.4 | 8.4 | 2.8 | |||
| South Korea | 14.3 | 7.4 | 2.8 | |||
| Venezuela | 11.4 | 8.1 | 2.2 | |||
| Thailand | 10.8 | 5.8 | 2.1 | |||
| Saudi Arabia | 9.1 | 9.8 | 1.8 | |||
| India | 8.4 | 5.2 | 1.6 | |||
| Indonesia | 7.8 | 4.5 | 1.5 | |||
| Israel | 5.6 | 3.7 | 1.1 | |||
| Nigeria | 5.2 | 5.7 | 1.0 | |||
| Memorandum: | ||||||
| All Countries | 509.2 | 330.1 | 100.0 | |||
| | ||||||
| Source: Congressional Budget Office based on data from the Bureau of the Census. | ||||||
| Note: Numbers are based on free-alongside-ship values of total exports and customs-insurance-freight values of general imports. | ||||||
