Benn Steil


A graphical take on geoeconomic issues, with links to the news and expert commentary.

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It’s (Almost) All Good on U.S. Trade Imbalances – China Remains Exception


The yearly U.S. trade deficit peaked at 6.4% of GDP in August 2006. It improved significantly after the financial crisis, bottoming out at 3.6% in January 2010. This swing provided a boost to GDP and nudged the U.S. external balance toward a more sustainable level. The deficit then resumed an upward march, reaching 4.3% by November. A closer look at America’s bilateral trading relationships since the deficit high-point in 2006 reveals a significant improvement with many countries, and only a small deterioration with a few others. China – with which the U.S. has its largest deficit – is the conspicuous exception, as the figure shows. 2011 looks set to be a year of yet further-rising trade tensions between the two countries. Read more »

Why China Should Revalue


China will hit a “growth wall” within the next three years, according to NYU economist Nouriel Roubini. The country’s reliance on fueling GDP growth through exports is unsustainable. He argues that China needs to revalue its currency so as to allow a transition from export-led to domestic demand-led growth. “The real income of households is going to increase, and they’re going to consume more. You export less and you consume more.” Is he right? Though there are more ways than one to skin this cat – domestic reforms that would facilitate faster rising Chinese wages, as advocated by Stanford economist Ronald McKinnon, are one way to fuel greater household spending – the data do indicate that Roubini is correct. As this week’s Geo-Graphic shows, when the renminbi appreciated significantly between 2005 and 2008 Chinese export growth slowed and household spending growth rose. This trend reversed after the pace of appreciation subsequently fell dramatically. This suggests that the Chinese government’s most recent five year development plan, which states that the government “must persist in the strategy of expanding domestic demand and maintaining steady and relatively fast development,” should include currency revaluation as a component policy element. Read more »

China’s Currency Head Fake


In the run-up to the June G20 summit in Toronto, China came under significant U.S. pressure to loosen its currency peg to the dollar. “The administration constructively set the G20 meeting as an important juncture for China to change its inflexible currency practices,” said Sander Levin, chairman of the House Ways and Means Committee on June 16th. “If China does not act and the administration does not respond thereafter, the Congress will act.” Then one week before the summit, China announced that it would relax the peg, and indeed the renminbi (RMB) began to rise. The political tension dissipated. Yet since July 2nd, five days after the summit, the RMB has ceased rising. It would appear that the much lauded Chinese currency pledge was a pre-summit head fake. Read more »

The Dangers of Debt: Russia and China’s GSE Dumping


In his recently published memoir, former Treasury Secretary Henry Paulson claims that Russian officials approached the Chinese in the summer of 2008 suggesting that both countries sell large amounts of debt issued by U.S. Government-Sponsored Enterprises (GSEs), such as Fannie Mae and Freddie Mac, in order to pressure the United States into explicitly backing these companies. Paulson, who found the report “deeply troubling,” claims that China opted not to collaborate with Russia. Nonetheless, both countries dumped GSE debt that summer, as illustrated in the figure above. Russia sold $170 billion during 2008, while China sold nearly $50 billion between June 2008, when its holdings peaked, and the end of 2008. During this fire sale the yield spread between GSE debt and U.S. Treasury debt soared, as illustrated in the figure below. As GSE debt was widely used as collateral in the U.S. repo market, U.S. financial institutions were obliged to quickly pony up more securities to support their borrowing. This exacerbated the growing credit crunch. The U.S. government was forced to put the GSEs into conservatorship in September 2008. Secretary Paulson was more right than he realized to be concerned. The episode highlighted the clear risks to the United States, and indeed the wider world, of growing American dependence on foreign government lending. Read more »

U.S. Goes Low-Tech On China Exports


Over the past decade, trade between the United States and China has grown dramatically while also becoming significantly more imbalanced. The United States ran a bilateral trade deficit with China of over $225 billion in 2009, compared with a $69 billion deficit in 1999. One factor contributing to this imbalance is U.S. export controls on certain high-tech products deemed important for national security. As illustrated in the chart above, the United States now exports to China relatively less machinery and relatively more crude materials, such as scrap metal, than it did a decade ago. China’s president Hu Jintao has urged the United States to relax technology export controls for years. The Obama administration is starting to push to do just that, in line with its goal of doubling exports in five years. U.S. Secretary of Defense Robert Gates has bluntly observed that “America’s decades-old, bureaucratically labyrinthine [export control] system does not serve our 21st-century security needs or our economic interest.” Read more »

China Is Not Helping Its Manufacturers


Chinese trade officials are reluctant to change China’s dollar-peg currency policy, citing concerns over the fate of exporters. Vice Commerce Minister Zhong Shan has argued that exporters will fail if the currency appreciates because profit margins are often less than 2%. However, when China International Capital Corporation (CICC) performed an analysis evaluating the effect of a hypothetical 5% increase in the value of the RMB against the dollar, by comparing decreases in revenue with the cost savings from cheaper imports, they found that most manufacturing sectors’ profitability actually increased. But as Chen Deming, the Minister of Commerce, has said, ‘we also have our own employment and stability to think about.’ Decreases in revenue suggest reduced employment, which Chinese officials appear unwilling to accept. Maintaining the peg can also, at least temporarily, prop up facilities that would not be profitable at a higher exchange rate. Supporting ventures that are unprofitable at equilibrium exchange rates will not, however, foster economic growth over the long run. Read more »

Japan’s Big Currency Bet


Because foreign currency reserves are viewed as a form of insurance, the risks of excess reserves are often overlooked. Japan holds reserves equal to 20% of GDP, more than it could possibly need for insurance purposes. These holdings make up a foreign asset portfolio that is subject to exchange rate risk. However, this risk is hidden because Japan’s reserves are primarily held in U.S. dollars and their value is reported in U.S. dollars. So as the local and global purchasing power of the dollar falls there is no change in the reported value of the reserves. As shown in the chart, Japan’s reserves increased by over $100 billion since June 2007, but fell by nearly ¥20 trillion when measured in local currency terms – over 4% of GDP. The risk of large losses in national wealth is even greater for China, whose reserves make up 50% of GDP. This risk will become apparent as and when China allows the renminbi to appreciate, in line with market pressures. Read more »

How “Global” Are Global Imbalances?



Global imbalances, as reflected in the current account deficits and surpluses of the world’s major regions, fell with the collapse of trade and oil prices in 2008, but should rise again as both recover. This chart shows that global imbalances are driven primarily by the U.S. and China. Absent significant macroeconomic policy changes in one or both, the likelihood of a sustained, significant improvement in global imbalances, without another crisis, is small. Read more »

Global Supply Chain



Over the last decade, Asia has developed into a major manufacturing base for the developed world. This relationship has provided mutual benefits: the West has received cheap goods while the East has developed its production capacity more quickly. China, to a significant extent, has been the assembler nation, importing raw materials and intermediate products from the rest of Asia and exporting finished products to the West. This relationship is illustrated in the chart above, which plots China’s imports from Asia and its exports to the U.S. and Europe since January 2000. Recently, however, this relationship has weakened slightly — China is providing more demand for Asian exports than the West is providing for Chinese exports. An important question is whether the strong Asian recovery can continue without a robust recovery in Western demand for Chinese goods. Read more »