Trade Has Saved America from Recession
by C. Fred Bergsten, Peterson Institute for International Economics
Op-ed in the Financial Times
June 30, 2008
© Financial Times
The global economy has clearly decoupled from the United States, and world growth remains close to 4 percent in spite of the absence of any increases in domestic US demand. Continued expansion abroad, especially in the emerging market economies, has in fact cushioned the slowdown and so far prevented recession in the United States. Hence we are also experiencing the first episode in history of reverse coupling, in which the rest of the world pulls the United States forward rather than the opposite.
The most striking feature of the current global economic situation is that the United States is the only major country that is seriously contemplating recession and that has adopted aggressive expansionary policies to combat that risk. Most other countries are more worried about inflation than slower growth. Many are experiencing reduced growth, to be sure, but part of their slowing is a natural cyclical reaction to four years of near-record global expansion, at more than 4½ percent from 2004 to 2007, and the need to focus on price stability. The additional losses because of the housing and credit crises in the United States amount only to a couple of tenths of 1 percent in most areas, including Europe and Japan. It will reach a full percentage point or more only in the fastest growers such as China, where expansion will remain near 10 percent. Many of these cuts are in fact welcome as their central banks are tightening monetary policy rather than easing it.
Global growth is thus still likely to approach 4 percent in both 2008 and 2009 in spite of the sharp slowdown in its largest single economy. The emerging market economies, which now account for half of world output calculated at purchasing power parity exchange rates by the International Monetary Fund, are still expanding at 6–7 percent. Even the nearest neighbors of the United States—Canada and Mexico—are nowhere near recession and have altered their policies much less forcefully. In spite of the international transmission of substantial financial as well as real economic shocks from the United States, the traditional relationship where "the world catches cold when the United States sneezes" no longer holds.
The second striking feature is the reverse coupling of the global economy. Over the past two quarters, the United States has recorded positive growth at an annual rate of 0.8 percent (in spite of the pronouncements of many observers that recession had already set in). Its "net exports of goods and services," the gross domestic product equivalent of the current account balance, have strengthened at an annual rate of almost 1 percent of GDP during that period. Hence the totality of recent US expansion has been provided by the strengthening of its trade balance. Domestic demand has been falling, but the United States has been saved from recession by the rest of the world.
The improved US trade performance of the past two years is due partly to the substantial, if lagged, restoration of the country's price competitiveness as the dollar declined by a trade-weighted average of 25–30 percent since early 2002, reversing most of its excessive run-up during the previous seven years that produced unsustainable current account deficits exceeding 6 percent of GDP. Equally important, however, is the continued robust growth of the world economy. Every percentage point by which the rest of the world expands domestic demand faster than internal growth in the United States produces gains of about $50 billion (€32 billion, £25 billion) for the US external balance. Weighted by US exports, foreign growth exceeded US growth by about 2 percentage points in 2007 and will do so by an average of about 1.5 points this year and next as decoupling persists. Taken together, these currency and comparative growth factors have already improved the real US trade balance, and hence GDP, by almost $150 billion since 2006, with gains of another $150 billion or so likely through 2009. (The nominal US trade and current account deficits will not improve as much because of the sharp rise in the price of oil imports.)
The Organization for Economic Cooperation and Development's new Economic Outlook projects that more than 80 percent of all US growth in 2008–09 will derive from continued strengthening of its external position. Exports have been climbing at an annual rate of about 8 percent, at least six times as fast as imports. Unless domestic demand takes an unexpected further fall in the quarters ahead, reverse coupling of the global economy will thus have prevented the US recession that was so widely predicted and feared. Presidential candidates and members of Congress who believe that the United States is losing from globalization should take note of this export-led growth and its creation of excellent new jobs, and recognize the folly of backing away from international trade at a time when it is providing critical gains for their country.
These international macroeconomic developments also provide another telling indication of the shifts in global economic power. As noted, the emerging market economies make up about half the world economy, so their growth of 6–7 percent assures reasonably strong world output increases even if there were no expansion at all in the rich countries. China alone accounts for 10 percent of the global total, so its annual expansion of 10 percent generates a full percentage point of world growth all by itself. The steadily rising diversification of global economic leadership is paying huge dividends to all its participants, most dramatically during this episode to the United States as export-led growth saves it from at least the worst ravages of its housing bubble and associated policy errors.