Finding Balance in Unbalanced Times

David Dapice is an Associate Professor of Economics at Tufts University and a faculty board member for the IGL.

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Not so long ago, it looked as if the United States was getting over its propensity to run unsustainable trade deficits, and the world economy could move to “rebalancing” — meaning that its growth did not depend on unsustainable debt growth in any major member. After a promising start in rebalancing, the world once again faces the danger of keeling over because of the debt crisis in Europe.

US trade deficits, both goods and services, had gradually fallen from a record $760 billion in 2006 to $700 billion in 2007 and 2008, and then plunged to a recession low of $380 billion in 2009.

The first half of 2010, however, deteriorated with a $500 billion annual deficit rate driven in part by a sharp jump in imports from China.

China’s overall exports had jumped 46 percent in May-June, with a monthly $20 billion trade surplus.

Threats to impose tariffs on Chinese exports to the United States to offset what’s termed unfair currency manipulation have only been put on hold given China’s promise to let its currency float a little, gradually.

Is the world ready to rebalance or return to the unbalanced state?