U.S., China Trade Imbalance Conflicts With G-20 Framework

Almost half of the increase of the U.S. deficit was attributable to China.

During the third quarter of 2009, the first quarter of global economic recovery, the U.S. trade deficit in manufactured goods increased sharply, as did the Chinese trade surplus, a resurgent imbalance that conflicts with the Group of Twenty (G-20) "Framework for Strong, Balanced and Sustainable Growth," according to a Manufacturers Alliance/MAPI report.

Ernest H. Preeg, MAPI Senior Fellow in Trade and Productivity, notes that the U.S. global trade deficit in manufactures rose from $67.9 billion in the second quarter of 2009 to $91.0 billion in the third quarter, or by 34%. Conversely, the Chinese global surplus rose from $87.7 billion in the second quarter to $106.5 billion in the third quarter, or by 27%. Almost half of the increase of the U.S. deficit was attributable to China.

Preeg warns that these figures are in stark contrast with the first half of 2009 as compared to the first half of 2008 when, as a result of the global recession, the dominant U.S. deficit was down by 36%, and the equally dominant Chinese surplus was down by 24%.

"Now that the economic recovery is under way, however, and despite all the official talk from the G-20 about 'balanced growth,' the trade imbalance in manufactures is surging again, with the U.S. and China at center stage," Preeg said. "If the resurgent trade imbalance continues at a similar pace in the next two quarters, a major confrontation over economic recovery strategy will likely take place at the next G-20 summit in Canada in the spring of 2010, if not sooner. In addition, the prospect for a continued surge in the trade imbalance for manufactures is highly likely unless more forceful policy actions are taken."

At the September 2009 G-20 summit meeting in Pittsburgh, the U.S. pressed trade surplus countries to pursue economic recovery strategies based on expanding domestic demand rather than export-led growth, while the U.S. recovery would be more export-driven rather than consumption-oriented, with the objective of reducing the excessive trade deficits of recent years.

Preeg urges the U.S. and the G-20 to review and revise the policy framework for balanced and sustainable growth and writes that "the issue of currency misalignment, centered on the undervalued yuan, needs urgent attention."

He also advocates that there may be a need to move from multilateral to unilateral or, even better, to concerted action with other affected G-20 members.

"The continued abdication of the International Monetary Fund to address currency misalignment," he concludes, "will soon present the United States with the choice of taking some form of alternative strong action to contain the rising trade deficit and consequent loss of manufacturing jobs, in particular, or of facing sharply rising domestic political pressure to go the protectionist route."

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