Imbalances back at pre-crisis levels as trade recovers

The recent round of international trade statistics suggests that global imbalances have more or less returned to their pre-crisis levels. This is bad news for the many experts who associate such imbalances with the global economic crisis.

Even those who would not see imbalances as the fundamental cause of the crisis would normally accept it is an important tension in the global economy. Large trade deficits tend to correspond with capital flowing in the opposite direction.

So American consumption is, in effect, subsidised by Chinese inves­tors buying US Treasury bonds. Germany has also played a key role in supporting the eurozone countries with which it has a substantial trade surplus.

John Bowler, the director for country risk at the Economist Intelligence Unit (EIU), says such imbalances are a symptom of funda­mental problems in the global economy.

Global trade fell sharply with the advent of international financial turmoil in 2008. But rather than lead to an adjustment that was seen as necessary by many, the imbalances are proving remarkably resilient.

Tu Packard, a senior economist at Moody’s, confirms that data from the past one or two quarters suggests the gaps are widening again.

The value of world merchandise trade – trade in goods – was about 25% higher in the first quarter of 2010 than in the same quarter last year, according to the latest figures published by the World Trade Organization (WTO). Global exports rose by 27% while imports increased by 24% year-on-year. (article continues below)

National data also suggests that the basic pattern of trade remains un­changed. China and Germany continue to run large trade surpluses; America and Britain still have large deficits.

America’s trade deficit rose to $49.9 billion (£31.9 billion) in June, the highest level since October 2008, when it was $59.4 billion. Over the second quarter, America’s imports hit a record high and exports fell again. Moody’s expects the deficit to widen slightly but to shrink by 2012.

Although Britain’s trade deficit narrowed to £3.3 billion in June, from £3.9 billion in March, it was still the largest since before Lehman Brothers filed for bankruptcy in September 2008.

Meanwhile, Germany posted a trade surplus of €14.1 billion (£9 billion) in June. Imports soared nearly a third from the year before. Exports rose at their fastest since reunification in 1990.

”There will always be imbalances in one way or the other”

As America and Britain reached their largest trade deficits since October 2008, Germany has reached a record trade surplus over the same period.

China, which overtook Germany as the world’s biggest merchandise exporter last year, reported a trade surplus of $28.7 billion in June, a 170% rise from a year earlier. Last year China’s trade surplus fell as the global crisis hit exports but rose again when the export sector started recovering.

“The global economy is still ­characterised by macroeconomic imbalances,” says Bowler at the EIU. “There will always be imbalances in one way or the other.”

If this is true it has worrying implications for the global economy. First, it is likely to lead to increased tensions over trade and even protectionism as each country pursues mercantilist policies. This is because the main global economic players are increasingly in conflict as they try to overcome their economic problems by promoting export-led growth. The paradox they face is that not every country can be a net exporter. On a global level trade has to balance.

The other side of trade tensions is the potential for greater financial volatility.

Despite the failure to reduce global imbalances, all the main players still have an interest in maintaining harmony in the global economy. But this task could prove increasingly difficult in a world in which trade gaps are so wide.