The IMF's meeting this spring was lauded as a breakthrough, with officials given a new mandate for "surveillance" of the trade imbalances that contribute significantly to global instability. The new mission is crucially important, both for the health of the global economy and the IMF's own legitimacy. But is the fund up to the job?
There is obviously something peculiar about a global financial system in which the richest country in the world, the US, borrows more than US$2 billion a day from poorer countries -- even as it lectures them on principles of good governance and fiscal responsibility. So the stakes for the IMF, which is charged with ensuring global financial stability, are high: If other countries eventually lose confidence in an increasingly indebted US, the potential disturbances in the world's financial markets would be massive.
The task facing the IMF is formidable. It will, of course, be important for the fund to focus on global imbalances, not bilateral imbalances. In a multilateral trading system, large bilateral trade deficits are often balanced by bilateral surpluses with other countries. China might want oil from the Middle East, but those in the Middle East -- with so much wealth concentrated in so few hands -- might be more interested in Gucci handbags than in China's mass-produced goods. So China can have a trade deficit with the Middle East and a trade surplus with the US, but these bilateral balances indicate nothing about China's overall contribution to global imbalances.
The US is jubilant about its success in expanding the IMF's role, because it thought that doing so would ratchet up pressure on China. But the US' glee is shortsighted. If one looks at multilateral trade imbalances, the US stands head and shoulders above all others. Last year, the US trade deficit was US$805 billion, while the sum of the surpluses of Europe, Japan, and China was only US$325 billion. Any focus on trade imbalances thus should center on the major global imbalance: that of the US.
The task of assessing trade imbalances -- whom to blame and what should be done -- involves both economics and politics. Trade imbalances are the result, for instance, of household decisions about how much to save and how much -- and what -- to consume. They are also the result of government decisions: how much to tax and spend (which determines the amount of government savings or deficits), investment regulations, exchange-rate policies, and so forth. All of these decisions are interdependent.
For example, the US' huge agriculture subsidies contribute to its fiscal deficit, which translates into a larger trade deficit. But agricultural subsidies have consequences for China and other developing countries. Were China to revalue its currency, its farmers would be worse off; but in a world of free(r) trade, US farm subsidies translate into lower global agricultural prices, and thus lower prices for Chinese farmers. By extending its largesse to rich corporate farms, the US may not have intended to harm the world's poor, but that is the predictable result.
This poses a dilemma for Chinese policymakers. Subsidizing their own farmers would divert money from education, health, and urgently needed development projects. Or China can try to maintain an exchange rate that is slightly lower than it would be otherwise. If the IMF is to be evenhanded, should it criticize US farm policies or China's exchange-rate policies?