President Obama says often that “we can’t go back” to the economy that existed before the current recession. This suggests that we might have to recognize that the U.S. economy, which had enjoyed strong growth over the last several years, is all but gone. But, some people think the economy may return to its old pattern, once confidence is restored and the current crisis recedes. They simply argue that the present economic changes are temporary and sooner or later the United States will enjoy its lavish lifestyle again. But Obama’s remarks indicate that he is not thinking this way. Indeed, they suggest that the world economy’s structures may be changing permanently, and shifts in the world’s trade structures are a signal of this trend.
The U.S. has severely reduced its imports, as excess consumption has waned. As the latest figures released on May 12th show, U.S. imports decreased in March for the eighth month in a row. Americans can’t afford to – or choose not to – buy from abroad as much as they did before the crisis, and remaining imports are mainly driven by the expanding government sector. The nation’s trade deficit was $385 billion, half of what it was at the same time last year.
On the other hand, Japan is taking the opposite course. Its trade account was in the red for FY2008 (April 2008 – March 2009), with a deficit 725 billion yen (roughly US$7.35 billion in early April). Although this is just a fraction of the U.S. trade deficit, it marks a big change, because Japan’s FY2007 trade account resulted in a surplus of 1,055 billion yen (roughly US$10.6 billion in April 2008 exchange rates).
This is the first trade deficit for Japan since FY1980, when it faced its second oil crisis. However, data from February and March 2008 suggest that the Japanese trade deficit will not persist. Imports have started to decline dramatically, by 43 percent and 37 percent from the previous year respectively; that is the biggest decline in Japan’s history. As a result, Japan’s trade account moved back to a surplus in the last two months of FY2008. Exports have already declined significantly last year, but on the other hand the decline of imports had been relatively slow until late 2008 Generally speaking, there is a time lag between exports and imports in responding to economic changes. The sales contracts for raw materials, which Japan imports in large quantities, are long-term, so Japanese companies can’t stop imports immediately. The February and March data suggest that the Japanese trade account will remain in surplus for the foreseeable future.
The trend toward surplus (or reduction of the deficit) in trade accounts is not confined to the U.S. and Japan but is also apparent in other economically advanced countries including some in Europe. In these countries, domestic demand as a whole is weak, because companies invest only within their own cash flow and consumers are reluctant to spend money due to anxieties about the future, or the adjustment of excess consumption in the U.S. and some European countries which have seen the end of housing bubbles. Many companies lack energy for new activities. In general, when an economy expands, companies enthusiastically raise funds indirectly or directly to increase industrial capacity, but the last period of expansion, which ended in late 2007, was led by only the household sector, not by the companies. This was a new experience for advanced economies. And now that the housing bubble has collapsed, governments have stepped in to become the driving economic force rather than the corporate sector. In part because of this new burden, the U.S. budget deficit will hit $1.84 trillion this fiscal year, or 12.9 percent of GDP. Other countries also are suffering from enormous budget deficits. They can’t rely permanently on fiscal stimulus plans to provide economic growth, and soon responsibility for economic activity will have to pass from the public sector to the private domestic demand sector. However, as I have suggested, the private sector will remain weak due to the companies’ conservative approach to new investment and the end of excessive consumption.
Under such a new economic environment, what drives the economy? Advanced economies might have to depend on exports, and thus developing countries’ domestic demands, which are still expanding. Some economists believe that the Chinese economy will rescue the world economy, for example. President Obama’s “Green New Deal” is an example of an approach to trade that complements this theory and may lead to changes in the structure of the global trade system. The plan may increase American exports and thereby stimulate the domestic economy by producing environmental high technology and selling it to developing countries such as China.
The unwillingness of the private sector in advanced economies to lead the way out of this global economic downturn through spending is a sign of economic maturity, but it might also lead to significant changes in global trade structures in which advanced economies are responsible for more exports and fewer imports. Advanced countries should consider their comparative advantages and discuss how to make stimulus packages in fields where they can sufficiently compete. Working to expand GDP and reduce the tax burden on households is a sufficient short-term measure, but exports are more necessary in the long term. Advanced countries should focus on two export sectors, goods and services.
In terms of goods exports, high-tech and environment-friendly products such as energy-efficient or hybrid cars are very promising. The “Green New Deal” which President Obama has launched is an attempt to turn in this direction. His plan has an impact not only on exports to developing countries, but will also stimulate domestic demand.
Service exports consist of travel, patents, royalties, and information. They are a kind of soft power, and the government’s role in it should be to lay the groundwork for the service export industry and to facilitate linkages. Governments of service-exporting economies should therefore work to stamp out copyright abuses and help attract consumers from abroad.
If governments can successfully set frameworks for the increased export of both goods and services in which their economies enjoy comparative advantages, the role of government in economic recovery will end and the baton can pass smoothly back to the private sector. The net result will be a restructuring of global economic activity, not a return to the pattern of the past.
Homi Kharas delivered the keynote address at IFPRI’s annual staff retreat on September 12, 2018. He explored the evolving development agenda and its implications for policy research.