Global imbalance has been widening on a large scale from the start of the 21st century and was received notice as a critical risk factor for the future of the world economy. Global imbalance was maintained by the inflow of the dollar from the surplus countries (China) to the deficit countries (U.S). Many economists worried that if profitability and stability of dollar assets became questionable because of decreasing credibility of the U.S economy, the risk of hard landing of the world economy would become a reality through volatile exchange rates and hikes in U.S interest rates. Fortunately, global imbalance was reduced considerably since the year 2007 and therefore the economists had less cause for worry about the possibility of hard landing due to global imbalance.
This study discusses the trend of global imbalance since the 1970’s, focusing on the U.S-Japan imbalance in the 1980’s and the U.S-China imbalance in the 2000’s. Then we analyze the adjustment process of global imbalance and its causes during the last few years. In doing this, we identified three possible causes– the U.S, China and the exchange rate. We find decreases in private consumption and increase in the savings rate in the U.S., increase in state-led investment and increase in consumption due to rising of income in China and also government policies in China. All of these causes result in narrowing of the savings-investment gap in both countries. Appreciation trend of the Yuan against the dollar also helped in reducing the imbalance.
We try to forecast whether the recent trend, the narrowing of global imbalance, will continue over the medium and long term horizon. To do this, we empirically investigate the determinants of the current account employing the national panel data. The results of the empirical study show that it is difficult to judge conclusively the continuity of adjustment of global imbalance, because there exists a mixture of positive and negative elements in the results. Reduction of government deficit of the U.S and more flexible exchange rate policy in China are the key factors that will determine whether the trend will continue.
We also try to draw implications of the adjustment of global imbalance for the structural fine tuning of the world economy. First, the U.S-China currency dispute which was called “the currency war” at the time of G20 of 2010 has been and will be further diminished. The adjustment this time will come not only from exchange rate adjustment but also from increases in U.S savings and China’s consumption, which can result in reduction of the saving-investment gap at the structural level. Second, the macroeconomic structural adjustment of the U.S and Chinese economies; and gradual progress made in the reduction of global imbalance. The U.S. efforts to increase exports, which will require strengthening of the competitiveness of the manufacturing sector, will take considerable period of time because the economy has been heavily dependent on the service industry including the financial sector over the last 30 years. Chinese efforts to rely more on domestic demand will accompany costs such as economic slowdown and workers’ adjustments to new industries. Third, it is necessary for the large surplus countries including Germany and regions like East Asia to participate in the global policy cooperation by increasing their domestic demand and imports, because the adjustment between the U.S and China is not sufficient to maintain and increase the global aggregate demand.