Global Trade Imbalances and China’s Role

1. Global Trade Imbalances and China’s Role Raghuram Rajan

2. Outline • Where did the global imbalances come from? • U.S. • China • What role are current policies playing in perpetuating them? • How might the imbalances narrow? • Is G-20 or IMF led policy coordination necessary or even feasible? • What are the risks?

4. Where did the imbalances come from? • The Spenders: U.S., U.K., Spain, Latvia… • The Producers: China, Germany, Japan… • The Resource Rich: Middle East, Latin America including Brazil, Africa

5. United States as spender • Consumption boom. • Financed by credit, especially housing credit. • Why? • Structural – growing income inequality • Cyclical – thin safety net • Global savings glut?

6. Growing income inequality in the United States Source: Golden and Katz 2009

7. Let them eat credit • As more Americans left behind in perception if not in fact, increasing polarization. • But education difficult to tackle • Redistribution? No political support + huge costs • But people care about consumption. So what if they don’t have income growth. • Consumption growth through credit growth • Better still, home ownership: stake in the future as well as means to borrow • Affordable housing (Clinton), ownership society (Bush) • Instruments: FHA, Fannie, Freddie, CRA

8. Consumption inequality has not increased commensurately…

9. Debt has filled the gap… as in the 1920s Source: Kumhof and Ranciere (2010)

10. Jobless growth in the United States and an inadequate safety net • Past recoveries • 2 quarters typically for growth • 8 months for recovering lost jobs • Thin safety net – 6 months: Created for in and out recoveries => incentive to search and match • 1991: 3 quarters for growth, 23 months for jobs • 2001: 1 quarter for growth, 38 months for jobs • Safety net inadequate for jobless recoveries

11. Consequences • Substantial government stimulus • But in the shadow of a crisis, opens the way for substantial excess • …and Fed stimulus • Which central banker would be brave enough to raise rates when unemployment is still high? • Bernanke/Greenspan Put • QE II • Jobless recoveries and inadequate safety net makes the U.S. the reliable stimulator of first resort

12. Summary: U.S. as spender • Structural forces: Consumption and credit to compensate for stagnating incomes • Cyclical: Frenetic policy as a response to a slow job market and a weak safety net. • Easy money: The “savings glut”

13. Outsourcing spending: The Producers • Exports as a strategy for growth • China, Germany, Japan • Savings and exchange reserves as a response to crisis • Malaysia, Thailand, Korea, Phillipines

14. Export-led strategies • Post-war Germany and Japan, followed by Korea, Taiwan, ASEAN, and now China: • Government and bank intervention to create a bias towards producers and develop strong firms • Discriminate against households • But • Small domestic market => Emphasize exports • It worked!

15. Source: JP Morgan

16. Producer biased growth • China • Low wages • Low deposit rates for households, cheap credit to corporations • Low corporate taxes, low requirement to pay dividends • Low compensation for land acquisition • Low costs for inputs – energy, resources

17. Chinese consumption is low because household income has fallen as share of national income.

18. Current policies…U.S. • U.S. stimulating spending once again. • Fiscal measures – First time home buyers credit, Cash for Clunkers, etc. • Easy monetary policy: QEII • Is the cost of capital really holding corporations back from investing? • Asset price channel • Exchange channel • Households have started to borrow and spend again: savings rate stabilized at 5 percent.

19. Source: New York Times

20. Silver lining: Manufacturing productivity increased and exports are climbing. Source: The Economist

21. Current Policies…China • Nominal renminbi appreciation halted for a long time to revive exports • China stimulated investment via massive credit expansion. • Plus tax benefits for consumption

22. Important changes are taking place • China is moving to expand domestic demand • Increase household incomes • Higher wages • Expand production in interior • Higher interest rates • Higher corporate taxes and more transfers to households • Higher value of renminbi Source: JP Morgan

23. How might the imbalances narrow? • Slow growth in industrial countries, and high government and household debt will force slower spending. • Large exporters like China will have to adopt policies to expand the domestic market. • Real renminbi appreciation will be one of the channels of adjustment.

24. Why adjustment is inevitable!

25. Is there a need for G-20 coordination? • Yes, even as U.S. domestic demand contracts, Chinese demand can expand to keep world growth growing. • No, policy lags are variable and uncertain, so even if we could coordinate policy, no reason to believe global demand would be smoothed. • No, impossible that large countries would agree to tailor domestic policies to a global timetable.

26. What role is there for G-20 /IMF? • Financial sector regulation, especially cross-border, and macro-prudential measures • To make sure countries don’t adopt harmful policies • Trade protectionism • Barriers to investment • International Currency? SDR?

27. Risks: Political • Global integration and technological change are creating winners and losers within, and between, countries. • Rising inequality • Fear will result in strange policies • Anti-immigration • Protectionism • Populism • Political upheaval and conflict will have wide effects

28. Risks for EMs • Emerging market policies have to focus more on domestic and regional demand. • All this has to be managed while keeping government finances under control, investment from becoming excessive, and debt-fuelled consumption from exploding. • Emerging markets typically do not have a track record of macro management except when the industrial world is doing well.

29. Bottom line • Good news: global imbalances will likely adjust as emerging markets expand demand • Bad news: Policy makers are typically not helping. • Hope: The adjustments takes place anyway.

30. Thank You