By contrast, US data treat goods coming from China via Hong Kong as being exported from China, yielding a bilateral trade-deficit figure of US$273 billion, up from US$203 billion in 2005.
Many researchers warned in 2005 that imbalances between the US and East Asia were unsustainable, saying that they were driven by excess spending in the US and undervalued exchange rates in East Asia. Excess spending was fueled by deterioration in the US fiscal balance, from a surplus of 2 percent of GDP in 2000 to a deficit of 4 percent of GDP in 2004. Undervalued exchange rates in Asia were supported by accumulated reserves of almost US$1 trillion in China, plus hundreds of billions of dollars elsewhere in the region.
Since 2005, US budget deficits have increased by another 6 percent of GDP, while China’s external reserves have increased by US$2 trillion. It is likely that at some point investors will be unwilling to continue lending to the US at low interest rates, and that China will regard continued reserve accumulation as a bad investment. At that point, the US trade deficit will shrink.
If imbalances between the US and China are thus unsustainable, it makes sense for policymakers to pursue a soft landing. In the case of the US, this requires recognizing that the government faces a budget constraint. For China, it means redirecting saving away from reserve accumulation toward cash-strapped small and medium-size enterprises, as well as much-needed investments in education, healthcare and affordable housing.
Willem Thorbecke is a senior research fellow at the Asian Development Bank Institute and a consulting fellow at Japan’s Research Institute for Economy, Trade and Industry.
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