REBALANCING TRADE / THE FINANCIAL TIMES LEX ( HIGHLY RECOMMENDED READING )

Rebalancing trade

Last updated: August 10 2010 18:33

Trade surpluses are a habit that is hard to break. China and Germany released large positive monthly balances in the past two days, while the Japanese trade account, which had slipped towards equilibrium during the last recession, is once again running at the pre-crisis rate of a positive 4 per cent of gross domestic product.

Even-handed economists consider such trade surpluses just as disruptive to global harmony as the corresponding deficits. But calls for more consumption from the excess exporters have gone unheeded.

Why? Mercantilist thinking may play a role, especially in China, which may view its huge foreign currency reserves as a form of security. But for Germany and Japan – and for the Netherlands, Taiwan and Sweden, which all run chronic trade surpluses – the surplus can almost be thought of as an accident.

In these countries, the quantity of exports is determined by industrial productivity (fantastic) and the position of export-orientated industries (privileged), while consumption and imports are strongly influenced by demographics (depressing) and tradition (buy local, save mightily). The pro-export factors outweigh the largely unrelated pro-import group.

The outcome is much the same in China, although some of the factors are different. The government likes to push exports, while most of the things that make life better in this still poor country – roads, new houses, electrical goods, finer food – can be produced domestically.

The big commodity exporting nations have a similar inability to absorb enough imports to reduce their surpluses – double-digit percentages of GDP on average between 2002 and 2007 for Saudi Arabia, Libya and Venezuela.

In theory, higher exchange rates can force trade into balance. But eurozone membership and the reliance on dollars for commodity trades limit the process. And in other countries, it is hard to change the habitual willingness of governments to cheer exporters on.

Copyright The Financial Times Limited 2010.