Trade Adjustments and Stimulus Packages in the Global Recession and Recovery

Published on ZNet, by Mark Weisbrot, July 25, 2009.

Global trade flows and the economic stimulus policies of individual national economies will play an important role in the recovery from the current global recession. This is especially true of the world’s two largest economies, the United States and China.

The U.S. economy was running an annualized trade deficit of $697 billion, or 5 percent of GDP, when our recession began in the last quarter of 2007. By the first quarter of this year, it had fallen by more than half to $327 billion, or 2.3 percent of GDP.

Partly this is due to the arithmetic of going into a world recession with a large trade deficit. If imports and exports decline by the same percentage, then the trade deficit will shrink, because the imports are bigger in absolute size. It so happens that our imports have declined even faster than our exports in percentage terms too, partly due to falling oil prices – which are also a product of the world recession. 

This means that the United States economy is getting a boost from the global economy during the Great Recession. It may not feel like that as we now hemorrhage jobs and have about one-sixth of the labor force officially unemployed or underemployed. But the national income accounting is real. If not for our shrinking trade surplus, for example, the first quarter of this year would have seen a fall of 7.9 percent of GDP, instead of 5.5 – a big difference in terms of output and employment.

Countries that export a lot (relative to their economy) and entered the recession with a surplus are affected by the opposite arithmetic: they get hit harder in the recession as their trade surplus shrinks. Japan’s GDP is projected to fall by 6 percent this year, much worse than the United States’ projected 2.6 percent. Although it is no consolation for the Japanese, their shrinking trade surplus contributes to the growth of the rest of the world.

Countries that export a lot to the United States have also gotten hit hard. Mexico, which exports more than 21 percent of its GDP to the U.S., is expected to shrink by 7.3 percent this year. Brazil, by comparison, exports less than two percent of its GDP to the United States (and does not have a large trade share of GDP overall), is expected to decline by 1.3 percent …

… The rich countries also seem to be more hamstrung than China. The United States has approved a stimulus package that for 2009 and 2010 – taking into account the spending cuts and tax increases by state and local governments – is only about 0.9 percent of GDP. This is a small fraction,  perhaps not even a tenth, of the expected decline in private spending from the bursting of our $8 trillion housing bubble.

Critics will point out that the Chinese government can move public investment projects much more quickly because it does not have to respond as much to environmental or other citizen concerns. But there are other stimulus policies in the U.S. that can be implemented very quickly. The sad truth is that in spite of our more developed system of governance, the rule of law, and a much more developed economy, the U.S. government has not been all that responsive to the most urgent needs of our national economy in a time of its greatest challenge since the Great Depression. In fact it is less responsive than the government of a middle-income country run by a Communist Party. That ought to give American pundits and social scientists something to think about. (full text).

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