Mar 17 2008
Silver lining of US recession- more balanced trade
Published by Jason Welker at 5:43 pm under
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WikipediaFT.com / World - Surplus countries told to encourage demand
Is it strange at all that in a time of rising unemployment, increasing uncertainty, rising prices and falling wages, consumers are being told to spend spend spend? This is the paradox of capitalistic markets in which macroeconomic health depend on continued spending, either in the form of consumption, investment, government spending or the sale of exports to foreigners. It is this last type of spending that has begun to slow for many of the world’s developing economies, those historically dependent on strong demand from consumers abroad for their output.
The “coupling” of the economies of several developing countries to that of the United States refers to the dependence on strong consumption by Americans of their exports. This symbiotic relationship, while it has contributed to a long period of high growth rates in many Asian economies, threatens to drag growth rates in several developing economies downward as Americans’ spending on imports declines.
China, one of those countries heavily dependent on export-driven growth, is now facing the prospect of a more balanced current account, which measures the difference between a countries income from exports and its expenditure on imports. Since the early ’90s, China has experienced consistent surpluses in its current account, and this will continue for the foreseeable future. Today, with falling demand for its exports from the US, China faces a new challenge:
Unwinding imbalances required domestic demand growth to slow in deficit countries but also to accelerate in countries with big surpluses from exports – such as China and oil-producing states.
It was, therefore, helpful that China planned to spend more on infrastructure, encourage household spending and allow more flexibility than previously in the exchange rate, he said.“If the slowdown is not to dominate, we need to see a shift in relative prices to rebalance demand – that is a gradual real exchange rate depreciation of deficit countries against surplus ones,” he said.
In AP Economics, we will soon begin our unit on international trade, in which we’ll study exchange rate determination and the effects of an depreciation of a nation’s currency. In this case, a weaker dollar will change “relative prices” by making Chinese imports more expensive to American consumers. Likewise, American goods will become cheaper to Chinese consumers, encouraging Chinese to buy more American products and fewer domestic ones.
The combined threat of falling exports and the change in relative prices that results in falling domestic demand will shift trade between the US and China towards a greater balance. According to NYT Economics columnist Paul Krugman, this rebalancing between the US and its trading partners may be just what’s needed to soften America’s economic decline.
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About the author: Jason Welker is a teacher at Zurich International School in Switzerland, where he teaches Advanced Placement and International Baccalaureate Economics. Jason was an international school student in Malaysia before studying economics at Seattle University then earning his Masters in Education. He calls Seattle and Northern Idaho home. In addition to maintaining an economics wiki and this blog for economics student and educators, Jason also gives presentations on using Web 2.0 tools in education at workshops and conferences around the world. His economics wiki won the 2007 "Best Educational Wiki" award from the "EduBlog Awards". 
![Freakonomics [Revised and Expanded]: A Rogue Economist Explores the Hidden Side of Everything](http://ecx.images-amazon.com/images/I/51Z1scnqz1L._SL160_.jpg "Freakonomics [Revised and Expanded]: A Rogue Economist Explores the Hidden Side of Everything")
Not only will this “rebalancing between the US and its trading partners” help soften America’s economic decline, but may also benefit China to some extent. Yes, China will be experiencing a slight blow to the economy, but we’ve seen plenty of articles speculating on how China may “suffocate on its growth.” With that in mind, this sort of rebalancing could be quite beneficial towards China.
Interesting that China might be the one buying goods from the US in the future. Perhaps this is the first step in the fall of the United States? Sure they may be the number one country right now, but signs point that perhaps China might be rising to take it’s place. I find the whole thing quite interesting. I agree with Alex’s statement that this recession will indeed benefit both countries.
Yes i think this rebalancing between the US and its trading partner, China would help america slowdown its ecnomic decline or perhaps even start inclining again. But it got me thinking that perhaps China’s economy will start to decline too in the near future as companies move out to counties with cheaper labor? (since it has already been driven up by cooperations)
It seems strange that the U.S. and China are “switching roles” in a sense. I wonder, though, if the U.S. has a large enough labour force and resources to take on the role of China as an exporter. I also wondered what would happen to the Chinese economy if this were to happen. Would the economy continue its unparalleled expansion because of its more expensive imports? The Chinese economy has already grown so rapidly that further growth seems almost unimaginable.
I don’t really see how having the US export more makes China become a more dominant country. Perhaps it becomes more consumer driven, while the US imports less. There is a more favorable balance of trade for both nations, and everyone’s happy. ok so some american ppl will get less cheap chinese goods but in the long run it doesnt really matter taht much
We see products everywhere with labels of “Made in China” and it’s pretty cool to see the potential for China to be the importer instead of the constant exporter. With a weaker U.S. dollar, China will be able to buy more goods from the U.S. while the rising RMB is going to act as part of the net export effect that slows down China’s growth. This might actually be helpful considering that China is in such rapid inflation. this might help slow it down a little, before China ends its expansionary phase into recession.
Hmm…how interesting. My dad mentioned this situation to me just a few days ago. China’s GDP will definetly slow down as it imports more US goods and exports less of its own goods. However, this may not be a bad thing for China. Many economists have warned that Chian is growing TOO FAST for its own good. China’s inflation rate are also about to go skyrocketing.
This rebalancing would probably seem ideal to china as well, since it’s already trying to dampen its booming economy by increasing the reserve ratio.
Since China is trying to prevent an overheating of the economy, this rebalancing will help it. As US imports decline, exports will rise as a result because with the greenback lower in value than before, foreigners will want more US products. This will help China because the country will probably spend a little more on imports, thus h elping to prevent the overheating.
I think this act is aptly named- rebalancing. I think it’s quite apparent that China does depend too much on U.S. exports, and is growing at a hyp, and, like Jack mentioned, perhaps too fast for its own good. A recession in the US, a decrease in the demand for Chinese exports, will force China to become more independent and to rely on its own consumers to keep the economy growing. This will also slow down what looks like demand-pull inflation.
Yeah, this re-balancing act seems rather interesting. I mean countless American products are “made in China.” But now for the Chinese they should be seeing a lot more American products. So I guess their is some what of a benefit for America with the declining value of the dollar. It seems weird that Chinese stuff will be worth nearly the same as American stuff, but if the dollar continues to get lower it may actually get pretty close. So maybe America isn’t in the best of situations for the economy currently, but at least they may help some aspects of the global economy, like China’s.
As everyone is saying, although having less foreign imports will hurt China in the short run, being forced to focus on its domestic population will only help China in the long run.
I agree that this will improve both countries in the long run, but I don’t for a second believe that America will be replaced anytime soon. China’s present growth should not lead us to assume that China’s anywhere near the United States.
I agree with what is being said. This is a good thing because it teaches China to be less dependent on other countries. Thus, creating a more stable economy in China.
I agree with mond in that China should become more independent. However, I don’t think this change will come about quickly. Plus stopping exports to other countries is good either.
It is a positive effect on global economy, since more american export counters, if only minimally, the recession in the us, while at the same time slows China’s inflation rate.
this will help china to stabilize china’s economy in the long run, as everyones saying, and i think that china will become more independent of other countries and more purchases on imports.
Wow I never thought about this. I guess it’s good that China and the US are slowly balancing out. If the US dollar continues to fall, will the two countries eventually reverse their roles? Wow. Wouldn’t it be really strange to have America exporting all goods and China buying everything? Everything would be “made in america” instead of “made in china.” Haha. Oh well. I highly doubt this will happen anytime soon, if ever.
This is will definitely have a positive step. It;s just like what Julie said, China will be more independent. This change may be just what society needs. It will help slow down and balance out China’s rapid growth in economy
I find it amazing how the American economy has the ability to “fix itself”. As the dollar value decreases, American goods will become less expensive to people in foreign countries and thus there will be a greater demand for the dollar which will increase the GDP in America and possibly help to not only balance trade in areas such as China but also to help America get out of its recession. I don’t believe that this can totally fix the” recession” but I believe it can help pull the lowering economy back up a bit.
Going with previous responses, i agree that this will benefit China as a world power. Not only might it pull the U.S. economy out of recession, but it would also help balance China’s growth. Thus this would help out just about everybody.
Many economists have speculated whether U.S. recession will bring “coupling” or “decoupling” changes in Chinese economy. Now that a few months have passed, the effects of plumetting Chinese stocks are becoming visible day by day. These patterns reveal that, although many have thought that “BRIC” countries would not be as severely affected by the U.S. recession, it has had great effect on the Chinese economy. Thus, I believe it is premature to say that China’s status as the rising economic superpower will guarantee a balance between Chinese and US. economy.