05/03/10 Stockholm, Sweden – For about the past half century the US has maintained a trade deficit. On the other hand, China has developed a trade surplus mostly because of the lopsided trade situation between the two countries. China makes a wide range of cheap goods and most of them are bought in the US.
During the financial crisis, and its aftermath, these imbalances seemed to rein in a bit and trade between the two countries looked like it could at least be headed back in the direction of a healthy alignment. However, it was a temporary and misleading close in the gap. The imbalance reduced only because global trade overall was shrinking… including the distortions… not because there was any real improvement in the US-China trade situation.
According to Newsweek:
“So is rebalancing going according to script? Well, not necessarily. True, massive trade imbalances have dropped sharply. The U.S. trade deficit fell from $760 billion in 2006 to $379 billion in 2009; China’s trade surplus also contracted. But these changes mostly reflect the Great Recession. As the slump worsened, people and companies stopped buying. Global trade collapsed—and with it the size of imbalances. But as the recovery has strengthened, trade and imbalances are growing again.
“What’s missing is a sizable revaluation of China’s currency, the renminbi. Fred Bergsten of the Peterson Institute thinks the renminbi may be 40 percent undervalued against the dollar. This gives China’s exports a huge advantage and underpins its trade surpluses. Other Asian countries fear altering their currencies if China doesn’t change first. “They’ll lose ground to China,” notes Hensley. The European Union, Brazil, and India all feel threatened by the renminbi. President Obama wants U.S. exports to double in five years. That’s probably unrealistic, but it’s impossible if the renminbi isn’t revalued.”
Above it’s described that “the recovery has strengthened,” but whether that recovery is real has yet to be seen. Given all the government intervention in the economy there’s plenty of reason to be skeptical.
If there is another leg down in the resurgent economy it’ll take global trade down with it as well. And, as for China and its renminbi… it’s taken some steps to loosen its tight grip on its currency peg but, at some point, it still has a ways to go.
Visit Newsweek for more coverage of how a new global economic order may be on the way.
Best,
Rocky Vega,
The Daily Reckoning
Rocky Vega
Rocky Vega is publisher of Agora Financial International, where he advances the growth of Agora Financial publishing enterprises outside of the US. Previously, he was publisher of The Daily Reckoning, and founding publisher of both UrbanTurf and RFID Update -- which he ran from Brazil, Chile, and Puerto Rico -- as well as associate publisher of FierceFinance. Rocky has an honors MS from the Stockholm School of Economics and an honors BA from Harvard University, where he served on the board of directors for Let’s Go Publications, Harvard Student Agencies, and The Harvard Advocate.
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