Return of the Killer Trade Deficit - editorial - New York Times

New York Times, editorial, 15/08/2010.-

The world economy is falling back on very dangerous habits. The United States is tentatively emerging from recession but is still at risk of another dip. Yet trade statistics released last week indicate that American consumers are sucking in large quantities of imports as spending recovers, while weak demand in the rest of the world is crimping American exports.

Meanwhile, China is mopping up demand everywhere you look with its artificially cheap supply of goods. Germany, the world’s other exporting power, is cutting its budget and relying on foreign demand to drive its economic rebound. This isn’t sustainable.

The bulging American trade deficit means that rising consumer demand is flowing to suppliers overseas rather than fueling growth at home. The American economy is too weak to carry this load. The recent trade data led economists to slash growth estimates for this year.

For the global recovery to continue, domestic demand must revive around the world. Other leading countries must do more to stimulate their own demand. And China cannot keep hogging the global export market.

The numbers are staggering. The United States trade deficit ballooned to $49.9 billion in June, the biggest since October 2008. In July, one month later, China recorded a $28.7 billion trade surplus, the biggest since January 2009. In the first five months of the year, Germany’s trade surplus, driven in large part by demand for machine tools in recovering Asian economies, rose 30 percent compared with 2009, to about $75 billion.

Unsurprisingly, data from both sides of the oceans mesh: the United States’ bilateral deficit with China rose 17 percent in June, to $26.2 billion — the biggest in 40 months. It rose 5 percent with Germany, to $3 billion.

The pattern underscores big problems with the mix of economic policies around the world. As Germany and other rich countries in Europe start slashing their budgets and the world economy slows, the United States — beleaguered as it is — has been left as a lone source of demand growth. Meanwhile, Beijing’s reluctance to end an economic strategy based on cheap exports is cementing its position as the world’s demand hog.

There are bad ways to address this problem. Punish China rumblings are back on Capitol Hill, but any move to slap punitive tariffs on Chinese goods could lead to destructive tit-for-tat retaliation. The drive by Congressional Republicans to end the Obama administration’s sensible (and still too weak) stimulus policies might help cut the trade deficit — but only by tipping the economy back into recession.

There is a proper approach to this rising threat. Chinese leaders have to finally rebalance their economy and rely more on internal demand and less on exports. The central bank announced in June that it would allow China’s currency to start inching up against the dollar — but it has risen less than half a percent. China must deliver. Rich economies with big trade surpluses and the ability to sustain budget deficits — most notably Germany — need to spend more, not less, at home and abroad.

After the risk of recession has receded, the United States must work to correct its longstanding trade deficit with the world by slowing national spending and increasing savings. But there will be no recovery — here or around the world — unless all of the major economic players do more to bolster demand right now.