The OECD projects the US current account to be in deficit by US$826 billion by 2006. In 1990 the US current account was in surplus. This deterioration in the current account of the United States and accompanying deterioration in the trade balance is unprecedented. It is ‘large absolutely, large relative to US GDP and large relative to the United States’ small export base’. Financial markets are worried about how and when this imbalance in the world economy will resolve itself. In this issue we examine the main causes of this growing imbalance in the world economy, its sustainability and implications for major variables like real exchange rates and interest rates as the imbalance corrects itself, which it must do at some point.
We are all in new territory given the U.S. abdication of leadership on trade liberalization and the Trump's administration [sic] hostility to the multilateral trading system. In rescuing the TPP and finalizing the Free Trade Agreement with the European Union, Japan has delivered mega trade agreements that carry a very different meaning from when the negotiations started. They make a stand in favor of open markets, tariff elimination exercises, and codification of rules at a time when there is grave concern over the direction of the two largest economies in the world.