China’s widening trade surplus and the growing US trade deficit since the pandemic have renewed concerns about global imbalances and fueled an intense debate on their causes and consequences, write the IMF’s Pierre-Olivier Gourinchas, Ceyla Pazarbasioglu, Krishna Srinivasan, and Rodrigo Valdés in a new blog.
“There are increasing worries that China’s external surpluses result from industrial policy measures designed to stimulate exports and support economic growth amid weak domestic demand,” the authors say, noting that some worry that the resulting overcapacity could lead to a surge of exports that would displace workers and hurt industrial activity elsewhere.
This trade and industrial policy view of external balances is incomplete at best and should be replaced with a macro view, the authors note.
“To understand the pattern of global external imbalances, we need to understand the macroeconomic drivers of desired saving relative to desired investment, not only in China, but also in the rest of the world including, importantly, the United States. While other countries contribute to global imbalances, the United States and China together account about one-third of the global current account balance.”
Even if they [industrial policies] may not be the major factor driving countries’ overall external surpluses, they still matter.
These may well generate sizable negative spillovers in trading partners, by undercutting the competitiveness and market access in other countries, exacerbating trade tensions. To avoid undue distortions, industrial policies in all countries should be confined to narrow objectives, the authors say.
In the European Union, income per person is on average one-third less than in the United States, mostly because of lower productivity. Europe’s aggregate productivity problem can be traced back to performance differences at the firm level, write Diego Cerdeiro, Gee Hee Hong, and Alfred Kammer in a new blog.
Among large, leading companies, productivity and innovation have diverged markedly across both sides of the Atlantic, the authors say. This significant difference is underpinned by much greater innovation efforts among enterprises in the United States, where research and development spending as a share of sales is more than double that of Europe.
Europe also suffers from a broader lack of business dynamism beyond large corporations. This weaker business dynamism is partly due to constraints to scaling up, particularly in innovation. Two key factors are a smaller market size and access to finance, note the authors.
Addressing these root causes behind the underperformance of European businesses will require significant action at both the EU and domestic levels, the authors say.
At the EU level, deepening the European single market would lift constraints to growth for Europe’s most productive firms, and removing remaining barriers to trade within the EU and advancing the capital markets union would incentivize firms to undertake R&D other investments that only pay off with a large customer base.
On the domestic front, easing remaining administrative barriers to entry would help more people start businesses, especially in services sectors. – IMF News
