Transpacific Trade Imbalances: Causes and Cures

Warwick McKibbin, Yung Chul Park, Jung-Wha (Jenny) Lee

    Research output: Contribution to journalArticle

    Abstract

    This paper 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 US fiscal deficits and the decline of East Asia's private investment after the 1997 financial crisis. Our simulation results show that a revaluation of East Asia's exchange rates by 10 per cent (effectively a shift in monetary policy) cannot resolve the imbalances. We find East Asia's concerted efforts to stimulate aggregate demand can have significant impacts on trade balances globally, but the impact on the US trade balance is not large. US fiscal contraction is estimated to have large impacts on the US trade position overall and on the bilateral trade balances with East Asian economies. These results suggest that in order to improve the transpacific imbalance, macroeconomic adjustment will need to be made on both sides of the Pacific.
    Original languageEnglish
    Pages (from-to)281-303
    JournalThe World Economy
    Volume29
    Issue number3
    DOIs
    Publication statusPublished - 2006

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