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Accelerating Trade Imbalance In Manufacturing: A Central G-20 Challenge In Seoul
By Ernest Preeg, MAPI/Manufacturers Alliance
epreeg@mapi.net
In April 2009, the Group of Twenty (G-20) adopted a framework for "balanced and sustainable" economic recovery, a clear reference to the unsustainable trade imbalances before the global recession, and the need to reduce the imbalances, centered on the unprecedented Chinese surplus and U.S. deficit in the manufacturing sector.
Manufacturing is the dominant sector of trade, accounting for 95 percent of Chinese and 80 percent of U.S. merchandise exports. It is also the most price-sensitive and therefore the most heavily impacted by exchange rates. Most important, especially for the United States and China, manufacturing is central to technological innovation, research and development and military modernization.
During the 2009 recession, trade surpluses and deficits declined substantially, as part of the cyclical pattern. Now, however, on the recovery path, the trade imbalances during the first half of 2010 have been increasing again at a rapid and accelerating pace. If this continues during the second half of 2010, as is likely, the G-20 leaders, when they meet again in Seoul in November, will face the daunting challenge of a more and more unbalanced and thus unsustainable economic recovery.
Chinese exports of manufactured goods rose from $494 billion in the first half of 2009 to $667 billion in 2010, or by 35 percent, well above the $630 billion in pre-recession 2008. The trade surplus was up from $186 billion in the first half of 2009 to $220 billion in 2010, or by 18 percent, approaching the $246 billion in 2008. Moreover, the surplus has been increasing at an accelerating pace. During the first quarter, the monthly surplus was $30 billion, which rose to $31 billion in April, $47 billion in May, and $51 billion in June. The June 2010 surplus was 87 percent higher than in June 2009.
As for bilateral balances, the Chinese surplus during the first half of 2010, compared with 2009, was up by 26 percent with the United States and by 40 percent with the EU. The Chinese surplus with the United States, however, was still 31 percent larger than with the EU, because Chinese imports of manufactured goods from the EU are double those from the United States.
The picture for the United States is similar, but in the opposite direction. U.S. exports of manufactured goods rose from $409 billion in the first half of 2009 to $495 billion in 2010, or by 21 percent. But imports were up by 22 percent, and thus the deficit rose from $138 billion in the first half of 2009 to $176 billion in 2010, closing the gap with the $218 billion deficit in 2008. And the second quarter acceleration in the rise of the deficit was also sharp, from a monthly deficit of $26 billion during the first quarter to $29 billion in April, $30 billion in May, and $40 billion in June. The June 2010 deficit was up by 73 percent, compared with June 2009.
As for bilateral balances, China accounted for 74 percent of the increased U.S. deficit in the first half of 2010, but deficits were also up with other trading partners, including Japan and Germany. Eighty-two percent of the increased deficit of $12.9 billion in the automotive sector was accounted for by Japan ($7 billion) and Germany ($3.9 billion).
These are the basic facts about the resurgent trade imbalances in the manufacturing sector that conflict with the G-20 strategy of balanced and sustainable economic recovery. The growing imbalances present a policy dilemma for nations trying to reduce their fiscal deficits while absorbing a growing trade deficit. The balanced G-20 recovery path would offset the growth-inhibiting impact of a reduction of the fiscal deficit with the economic stimulus and job creation of a declining trade deficit. If, in contrast, a reduction of the fiscal deficit moves ahead together with a growing trade deficit, there is a mutually reinforcing slowdown in growth and jobs. This is the prospect facing the United States, with principal adverse impact on the manufacturing sector.
For the United States, this all comes during the course of a heated election campaign, where lagging job creation is the central issue of debate. A projected increase in the trade deficit for manufactured goods in 2010 of upwards to $100 billion translates into roughly a half-million fewer jobs in the sector than if the trade balance had remained at the 2009 level.
The questions ahead are whether the rapid rise in the trade imbalances will continue in the second half of the year and, if so, what will the G-20 leaders do in November to reverse the upward trend. The answers are likely to be troubling at best.
There is little to suggest that the trade imbalances will begin to decline during the remainder of 2010. The greatly undervalued Chinese currency continues to be a major incentive for a growing surplus. The Chinese surplus rose sharply in July, with exports up by 38 percent from July 2009. U.S. economic growth, while inadequate, is still higher than in Europe and Japan, which means relatively lower export growth to and higher import growth from these trading partners.
As for the G-20, during the June 2010 meeting the handling of trade imbalances and exchange rate policy can be characterized as a dialogue of the deaf. China claimed total sovereignty over exchange rates, but obligations in international organizations and treaties often, by definition, involve limitations on sovereignty. IMF Article IV obligates members not to manipulate their exchange rates to gain an unfair competitive advantage in trade, with currency manipulation defined, most explicitly, as protracted, large-scale purchases of foreign exchange by the central bank. This subject, however, was not addressed, and the very lengthy final statement by G-20 leaders made no mention of exchange rates. There had been a sentence on the subject in the draft text, but China insisted on its removal and the others acquiesced.
Looking ahead, the Korean government is intensively engaged in preparation for its chairing of the November meeting, covering a wide range of issues. But thus far, apparently, the issues of growing trade imbalances and exchange rate misalignment, as threats to sustained economic recovery, have not been fully addressed. Hopefully, this will soon change as the resurgence of trade imbalances receives wider public attention. If not, and the issues are again excluded from serious discussion and effective remedial action, especially concerning exchange rate misalignment, the follow-on question will be how otherwise to deal with unsustainable trade imbalances if the G-20 is not up to the task.
-- Ernest Preeg is Senior Advisor on International Trade and Finance at the Manufacturers Alliance/MAPI, and author of "India and China: An Advanced Technology Race and How the United States Should Respond" (MAPI and CSIS, 2008).
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