Tags

, , , , , , , , , , ,

For a long time, I’ve joined with many others in arguing that reducing the U.S. trade deficit is the nation’s best option for strengthening the still historically feeble economic recovery.

Shrinking the gap between American exports and imports quickens growth and therefore spurs hiring. Nearly all the gains come in the private sector. Similarly, trade deficit reduction would accomplish all these vital goals by strengthening U.S. national finances. Whereas tax cuts and/or more government spending can only increase the national debt (at least short term), trade deficit reduction actually reduces it, all else equal, by boosting the level of taxable economic activity.

Perhaps best of all, lower U.S. trade deficits will stabilize the global economy, by better aligning patterns of world production and consumption, and thus decreasing the debt-fueling worldwide imbalances that helped trigger the financial crisis – and could pave the way for another.

As its persistent protectionism shows, China doesn’t give a fig about global imbalances (though arguably a less crisis-prone world economy serves its interests, at least over time). But interestingly, savvy observers are increasingly speculating that Beijing will soon look to trade to boost its economy precisely because of growing financial worries.

China of course runs big surpluses in trade and in the broader current account (which includes financial flows). But Beijing reportedly is growing getting scared about threats on other financial fronts – including its local governments, its corporations, and the shadow banking sector. (Given how government at all levels still dominates Chinese economic activity, these debt dangers are even more intertwined than they often are in free-market – term used advisedly – economies.)

As a result, a widely followed London-based analyst – Charles Dumas – has pointed out that China can at least maintain adequate growth without relying even more heavily on these overheated growth engines by devaluing its currency and therefore further increasing its trade surplus. In his words, “”China needs to keep growth up while getting excessive investment down….The bridge to the desired result has to be greater net exports. There is nothing else.”

Because a weakening yuan could worsen fragile-enough growth elsewhere, Bloomberg View columnist William Pesek fears that a China devaluation could spark a round of worldwide currency wars and deepen the world’s economic predicament. My even bigger fear – other protectionist countries, like Japan and Korea, along with the struggling Eurozone – might enter the beggar-thy-neighbor business, too, but that ever-clueless U.S. leaders will keep looking the other way. The resulting jump in American deficits would bring a new, probably even greater, financial crisis that much closer.