4 Rebalancing Trade after the Crisis Caroline Freund
Global trade imbalances have surged since the early 1990s. Figure 4.1 shows an index of global trade imbalances (GTIs)—the sum of the absolute values of trade balances across countries—in log levels. The average annual growth of global imbalances was 11 percent from 1990 to 2007, relative to only 1 percent in the previous 20 years. In contrast to global imbalances, global trade grew at a strong and steady pace of about 6 percent a year over the whole period. The growth of global imbalances has been a cause for concern since the new millennium, when the GTI approached a level nearly twice the previous peak. As discussed in earlier chapters, some economists believe the surge in global imbalances contributed to the onset and severity of the financial crisis. For instance, Bernanke (2009) argues that imbalances were an important cause of the crisis because they depressed global interest rates, leading investors to search for higher yields and to underprice risk. Obstfeld and Rogoff (2009) suggest that large global imbalances could also be a symptom of financial distress, without being a cause. They contend that policies pursued in Asian countries and the United States led to unstable financial conditions and global imbalances. As time passed, ever-growing imbalances magnified financial instabilities. Whether global imbalances are a cause or a symptom, however, they are malignant and are associated with an unstable financial system. A more stable financial system must therefore involve more balanced capital flows. A world with more balanced capital flows has important implications for bilateral trade and global trade growth. As capital has migrated to the United States, so have imports. With more balanced capital flows, the United States could no longer be a rapidly growing market for the world’s exports. And, with more balanced capital flows, China could not maintain export growth at precrisis
levels. If capital flows do become more balanced, what will drive future trade growth is not clear. The financial crisis has already shocked trade patterns, leading to a reduction in real trade of 12.2 percent in 2009,1 a magnitude not seen since the Great Depression. The collapse of trade can be explained in part by the global imbalance view of the crisis. This view maintains that because of a global savings glut, global interest rates were severely depressed. The crisis caused interest rates to shoot up. Rising interest rates, in turn, led to a sharp drop in investment and consumption in borrower countries. The effects on industrial production and consumer goods, and therefore on trade, were especially strong. As both exports and imports fell dramatically, so too did the gap between them, immediately cutting imbalances to respectable levels. The important question is whether the fall in trade and global imbalances is a short-run phenomenon or a structural change brought about by the crisis.2 If it is a shortrun change, many of the same issues that plagued the financial system in recent years are likely to reemerge. If it is a shift to more balanced flows, the world may be moving to a more stable financial system. In that case, however, trade patterns will look very different in the future. In this chapter, we examine the extent to which the crisis is responsible for rebalancing trade and whether that shift is sustainable. Unlike other papers on current account adjustment, we approach the question from the real side.3 First, we investigate how trade balances have adjusted following the financial crisis. Specifically, we calculate how much of the adjustment is a result of the drop in trade and how much is a result of rebalancing between export and import growth. We argue that a shift due to the drop in trade is likely to be reversed as global income expands but that rebalancing likely reflects shifts in attitudes toward saving and investment. 41