CIAO DATE: 11/05

Transpacific trade imbalances: causes and cures

Abstract

This Issues Brief by Professor Warwick McKibbin and others explores the causes of the transpacific trade imbalances using an empirical global model. It also evaluates the impact of various policies to reduce these imbalances.

We find the fundamental cause of trade imbalance since 1997 is changes in saving-investment gaps, attributed to the surge of the U.S. fiscal deficits and the decline of East Asia's private investment after the 1997 financial crisis.

An appreciation of East Asia exchange rates (including by China) alone will have an impact on economic activity in the appreciating economies, but does little to change the underlying savings and investment patterns and therefore has insignificant impact on the transpacific trade balance.

Full text (PDF, 36 pages, 1.56 MB)