Experts against export

Editor's column for The Times

The world economy is returning to extremely dangerous habits. Although there are reasons to believe that the United States is emerging from recession, the danger of a new round of recession has not disappeared. Recently released statistics show that together...

The world economy is returning to extremely dangerous habits. Although there are reasons to believe that the United States is emerging from recession, the danger of a new round of recession has not disappeared. Recent statistics show that as US consumer demand strengthens, so does imports, while weak demand elsewhere is weighing heavily on US exports.

Analysts clearly see how China is grabbing an increasing share of local markets by maintaining artificially low prices for its exports. The world's second largest exporter, Germany, is cutting its budget and trying to bring its economy out of the crisis with foreign demand. This situation is extremely unreliable.

The widening of the US trade deficit shows that the recovery in consumer demand only benefits foreign producers and does not contribute to the growth of the US economy. Fresh data on the trade balance forced leading economists to lower their forecasts for economic growth expected this year.

In order for the world economy to begin to emerge from the crisis, an increase in domestic demand in all countries is necessary. The leading economic powers are obliged to take more vigorous measures to stimulate it. And China must stop blindly increasing its exports.

The numbers are amazing. In June of this year, the United States trade deficit amounted to a sky-high $49.9 billion, repeating the October 2008 record. Already in July, China's foreign trade surplus reached $28.7 billion, which was also the largest since January 2009. In the first five months of this year, Germany recorded a positive trade balance of $75 billion, ie 30% more than in 2009. This became possible mainly due to the increasing demand for industrial equipment as the Asian economies emerge from the recession.

Not surprisingly, there is a clear correlation between these figures and such indicators: the size of the US trade deficit with China rose 17% in June to $26.2 billion, the worst in 40 months; in trade with Germany, the deficit increased by 5%, amounting to $3 billion.

These data underline the seriousness of the problems that the world economy is experiencing in the absence of a common economic policy agreed between all participants in world trade. While Germany and other wealthy European countries are cutting their budgets, all hope for a rise in consumer demand is pinned on the United States. At the same time, China is turning into a global supplier.

There are growing voices in Congress demanding that China be punished, but any move to impose protective tariffs on Chinese goods will elicit equally devastating retaliatory measures. Attempts by Republican congressmen to end the Obama administration's prudent (albeit not decisive enough) policy of creating economic stimulus to reduce the trade deficit could only return the recession.

Reasonable and justified measures are needed to overcome the growing deficit. The Chinese leadership needs to finally reorient its economy from exports to meeting domestic demand. In June, the Chinese Central Bank announced that it was ceasing to prevent the Chinese currency from slowly rising against the dollar, but since then the rate has risen by less than half a percentage point. This is clearly not enough. Wealthy economies whose exports far exceed their imports (primarily Germany) should increase rather than cut their domestic and foreign spending.

Once the danger of a new recession is over, the United States needs to address its long-established foreign trade pattern with the rest of the world by lowering domestic consumption and increasing savings. But neither the US nor the global economy will be able to get out of recession unless the major economic players immediately begin to do more to stimulate demand.