Asia, US spar over global imbalances


The annual meeting of Asian development bank saw some hard posturing by Asian and US representatives at the gathering of policymakers in Hyderabad, India. The arguments in the meeting suggested that real politic rather than economic rationale could play a larger role in the days to come. Skyrocketing oil prices and a widening US current account deficit has created imbalances that would take sacrifices from every nation to iron out. US treasury Under Secretary Timothy Adams said at the meeting that for every dollar decrease in the US current account deficit, there should be an adjustment somewhere in the world countries.

The Chinese warned against politicizing the issue of its foreign currency management, the Americans left enough hints that protectionist sentiment may be building there. India was of the opinion which it expressed in the meeting that it may not like a common prescription as its contribution to the imbalance was minimal.

The US has expressed that the solution lies in China reducing its cheap exports and allowing more imports to balance the skewed trade equation. US have a trade deficit of over $800 billion currently and China has a surplus of $224 billion and a foreign exchange (FE) reserve of $875 billion. It is the largest FE hoard in the world. China, Japan and Germany now account for about half of the world’s surplus. The US deficit is weighing down the dollar, which is losing value against other currencies.

Experts say that the imbalances did not happen overnight and demographic factors have affected savings, hinting at China’s high savings rate of over 30%. A complex web of driving forces has brought US to the current situation and there is no quick way of unwinding them. It has to be a shared responsibility. But things are slowly getting out of hand. The U.S. Federal Reserve is gradually raising interest rates, which is expected to dampen consumer demand and contain inflationary pressures.

The U.S Economy is at a critical juncture with many experts raising the specters of a bubble. If Fed tightens rates further, demand will decrease and Asian exports will suffer, potentially affecting industry profits, jobs and income. The cascading effect could lead to a worldwide recession.

An authority on the subject of Global macroeconomics said that Asian nations, particularly China, should focus on selling more to their own large markets than indulging in cheap exports. Simultaneously, they should also allow their currency to freely trade against the dollar, which would mean the exchange rate would depend on the markets. The U.S. also wants freer access to Asia’s markets.

China’s vice finance minister, Lee Yong told delegates at the ADB meeting that he was also concerned about Global imbalances. Lee also agreed that the responsibility had to be shared.

China wants to balance its export and imports and it was working towards that goal. Protectionism will be detrimental to global growth. China needs consultation not to politicize the issue. The Global financial architecture should be reformed.

India pointed out that they should be considered differently and also agreed that a cooperative approach was necessary. Each country should have a different approach. The Indian Finance minister said that the oil exporters have to be blamed more as they had invested their huge surpluses in American Assets. Oil exporters have taken advantage of the booming equity and real estate assets to invest their dollars earned through oil.

Asian nations seem to be agreed on the fact that though tackling the imbalances was a priority, it should not be dictated by the U.S.