The major economies of the world continue to be vexed by growing trade imbalances, causing worries among the policymakers that such a situation is unsustainable in the long run and, therefore, posed a high degree of risk to the existing order. The latest available data, in particular, indicated that the system was not amenable to a self-correcting mechanism and could be manipulated if proper rules of the game were not observed.
China s trade surplus during July, 2011, for instance, expanded further to dollar 31. 48 billion as exports were up by 20. 4 percent to reach a new record of dollar 175. 13 billion. This trade surplus was well in excess of June s dollar 22. 27 billion and also outstripped a Dow Jones forecast of dollar 26 billion, based on a poll of economists. It may be mentioned that China s trade surpluses have allowed it to accumulate around dollar 3. 2 trillion worth of foreign exchange reserves, nearly dollar 1. 2 trillion most of which are in US Treasury Bonds. On the other hand, the US trade deficit increased much more than expected in June, 2011, the latest month for which the data are available, and was recorded at dollar 53. 1 billion, the widest gap in exports and imports in more than two and half years, surpassing projections of most of the analysts who had penciled the estimated deficit at dollar 48. 0 billion for the month. The trade gap with China, which is politically more sensitive, widened by 6. 8 percent to reach dollar 26. 66 billion. The trade deficit in June, 2011 was only about dollar 6 billion lower than the biggest recorded at dollar 59. 5 billion in October, 2008.
Although, huge trade imbalances in the two major economies were always a matter of concern, but more disconcerting now is the fact that the latest developments appear to be somewhat at odds with the generally accepted theory on the subject and, therefore, hard to understand. For instance, it is difficult to explain why exports from China should continue to rise at such a rapid pace when the economies of US and euro zone are facing tough times and consumer confidence is sliding. With fiscal austerity taking hold across Europe and slowing growth in Asia, room for China s exports should have shrunk rather than expanded. The ongoing debt crisis in the US and fears of recession should have also played a part in restricting exports to the US. Besides, a surge in China s exports has occurred despite its economy contracting for the first time in the year in July due to Beijing s efforts to slowdown its pace. Economic experts are now worrying what more could be done to reduce the global trade deficits when traditional measures to achieve such an objective have not yielded the desired results. China s major trading partners have long complained that yuan has been kept undervalued deliberately to give Chinese exporters an unfair advantage. Obviously, more pressure would now be brought on Beijing to allow yuan to appreciate.
Such a pressure is certain to increase the tensions between China and its key trading partners and could be regarded as an indicator of troubling times ahead. The growing conflict could lead to a lot of possibilities. Gold standard or a model based on the characteristics inherent in such a system is difficult to adopt at this stage because of its limitations in the modern age. The SDR was one possibility which has already failed to gain universal acceptance. A sad aspect is that the International Monetary Fund, which is supposed to play a pioneering role in reducing trade imbalances and is usually very tough with countries like Pakistan, is too meek when dealing with more powerful countries. Its currency appreciation advice is not listened to properly or usually turned down with disdain. Sadly, however, a stage has now been reached when someone has to take the lead to readjust the existing world economic order to the new realities. Every nation will be a loser in the long run if the world leaders fail to take stock of the situation and do not devise a new strategy with a view to overcoming the huge deficiencies which are a part of the present system.
Courtesy: Business Recorder
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