Causal global imbalances

David Pilling’s recent FT column (12 October 2011) makes the important point that fiddling with the RMB/USD exchange rate will do little to repair the economic plight in which the US currently finds itself.

It is true, of course, that surpluses in one part of the world have to be matched dollar for dollar by deficits somewhere. It doesn’t follow, however, that it is the trade surplus in China that has caused the trade deficit in the US.

A large fact relevant here is that (to paraphrase Stephen Roach) the US doesn’t have a bilateral trade problem with China; the US has a multilateral trade problem with over 100 different trading partners.

This article documents how the US trade deficit against China is matched – in trend, in magnitude, in little wiggly twists and turns – by the US trade deficit against other parts of the world.

An observer might even conclude that the problem is not that of a bilateral exchange rate against the RMB but instead of US excess consumption swarming over pretty much all the rest of the global economy.


If nothing else were to change, simply appreciating the RMB against the USD or raising US tariffs against China will only divert US consumption towards more expensive, less efficient producers, thus taxing the US consumer and leaving unaffected the overall size of the US trade deficit.

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