I'm on a break from jury duty this week-end, so I'll try to put together a couple posts. Apologies if they are a bit jumbled; my mind is cluttered with non-IEL thoughts.
First up, the issue of trade "rebalancing." Leading up to the G-20 meetings, economist Kenneth Rogoff writes:
G-20 leaders who scoff at the United States’ proposal for numerical trade-balance limits should know that they are playing with fire. The US is not making a demand as much as it is issuing a plea for help.
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In light of America’s current difficulties, its new proposal for addressing the perennial problem of global imbalances should be seen as a constructive gesture. Rather than harping endlessly on China’s currency peg, which is only a small part of the problem, the US has asked for help where it counts: on the bottom line.
True, today’s trade imbalances are partly a manifestation of broader long-term economic trends, such as Germany’s aging population, China’s weak social safety net, and legitimate concerns in the Middle East over eventual loss of oil revenues. And, to be sure, it would very difficult for countries to cap their trade surpluses in practice: there are simply too many macroeconomic and measurement uncertainties.
Moreover, it is hard to see how anyone – even the IMF, as the US proposal envisions – could enforce caps on trade surpluses. The Fund has little leverage over the big countries that are at the heart of the problem.
Still, even if other world leaders conclude that they cannot support numerical targets, they must recognize the pain that the US is suffering in the name of free trade. Somehow, they must find ways to help the US expand its exports. Fortunately, emerging markets have a great deal of scope for action.
India, Brazil, and China, for example, continue to exploit World Trade Organization rules that allow long phase-in periods for fully opening up their domestic markets to developed-country imports, even as their own exporters enjoy full access to rich-country markets. Lackluster enforcement of intellectual property rights exacerbates the problem considerably, hampering US exports of software and entertainment.
A determined effort by emerging-market countries that have external surpluses to expand imports from the US (and Europe) would do far more to address the global trade imbalances over the long run than changes to their exchange rates or fiscal policies. Emerging markets have simply become too big and too important to be allowed to play by their own set of trade rules. Their leaders must do more to tackle entrenched domestic interests and encourage foreign competition.
So he mentions four policy options here to deal with the "rebalancing" of trade: Numerical targets, unilateral trade liberalization by developing countries, more flexible exchange rates, and fiscal policy.
He starts by saying we shouldn't criticize the U.S. proposal for numerical targets, but then he says numerical targets won't work. (Numerical targets have always seemed strange to me. They are not really a policy in and of themselves. Aren't they just a commitment to adopt an undefined actual policy to address trade imbalances?)
He doesn't say much about exchange rate flexibility, although he implies that it will not have much impact, stating that China's currency peg is just a "small part of the problem."
He then offers unilateral trade liberalization by developing countries as the solution to the problem of trade imbalances. This will be more effective than exchange rate changes or changes in fiscal policy, he says. He also says: "Emerging markets have simply become too big and too important to be allowed to play by their own set of trade rules."
This sounds like a call for the end of S & D treatment, at least for the wealthier developing countries. Basically, his view seems to be that these developing countries are more closed to trade than developed countries, and therefore the developing countries should do their fair share by opening up their markets.
As much as I like the idea of unilateral trade liberalization in general, I'm guessing that his suggestion will not be very well received.
As for fiscal policy, I'm skeptical that any kind of coordination among governments is possible. People have a hard enough time agreeing on these issues domestically.
Having been somewhat critical of all of the above options, now let me admit that I don't really have a solution of my own. As with anything related to the G-20/8/etc., I'm basically just an observer. I can't get my head around how this kind of "soft law" should work!
Here's one final point about rebalancing, turning back to currency issues (sort of). Ryan Avent of the Economist's Free Exchange blog talks about the "spillover" effect of U.S. quantitative easing on other currencies:
The spillover argument is both more of an issue and less the kind of thing the Fed should worry about. Struggling rich countries worried about appreciation of their currencies could simply respond in kind—should actually. Emerging markets must get more used to the idea that capital needs to flow their way in a rebalanced world. They are right to fear sudden surges in capital flows, however, and this is a topic that should (and will be) discussed at the G20 meetings. Limited and considered capital controls may be the way to go in some cases, if only to act as surge protectors.
I've said before that I don't think quantitative easing is like a currency peg, because the goals are different. With quantitative easing, the main goal is not currency depreciation. However, such depreciation is an effect of this policy, and other governments might care more about actual effects than whether the intentions were pure. So how should other governments respond? One suggestion he makes is to "respond in kind," which I assume means quantitative easing of their own. The problem is, if you think quantitative easing is bad policy, which many do, you won't necessarily want to engage in it.
More generally, if other governments don't like the impact U.S. quantitative easing is having on them, when they have not done anything wrong themselves in their view, they might not be very pleased with his other suggestion of, in essence, "getting used to it."
And here's more from Free Exchange, this time from blogger "G.I.":
Quantitative easing is fully justified by high unemployment and falling inflation at home, but the Fed is being pummeled in the court of public opinion because its motives are suspect: other countries think the Fed is trying bludgeon them into assuming more of the burden of global growth via a vastly depreciated dollar.
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So what is it about QE that causes the world to impart motives to the Fed that are absent with conventional monetary policy? I think it stems from a misconception of what QE does, as well as an overuse of the term "liquidity". Purchasing bonds with newly-created bank reserves will only expand the overall domestic supply of credit if banks on-lend the extra reserves. That is not happening: broad measures of bank credit continue to contract. Nor does QE create foreign liquidity; the Fed can do many things, but printing foreign currency is not one of them. If QE works as advertised, the decline in the exchange rate will eventually narrow the US trade deficit and reduce the US demand for global savings (though that will be offset as lower interest rates boost domestic investment and consumption). But that hardly turns it into a contributor to the supply of global savings, much less on anything like China’s scale.
I think there are two problems here, both mentioned above to some extent. First, not everyone agrees that QE is justified, and thus some may be suspicious of the true motives. And even if the motives are pure, the impact is still quite large, and thus the absence of bad intent doesn't make anyone feel better about the impact.
