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Coping with more balanced trade: Asia vs. Latin America.

The growing consensus is that U.S. trade needs to be brought toward balance. Yet, any policy that reduces the trade deficit will require America's trading partners to adjust their own.

On October 19, Federal Reserve Chairman Ben Bernanke told a conference that trade imbalances have played a central role in the worst global financial crisis since the 1930s. "We must avoid ever-increasing and unsustainable imbalances in trade and capital flows," he warned.

U.S. Treasury Secretary Timothy Geithner issued a statement to the annual meeting of the International Monetary Fund and the World Bank that said: "We recognize that the world cannot return to a pattern of uneven growth, characterized by an excessive reliance on a single engine of consumption-led growth, while others relied heavily on external demand. First and foremost, the responsibility for tackling these problems rests with sovereign governments, including my own." The emphasis in both statements on government policy implies a move away from the "free trade" faith in private markets. The forces that generated the imbalances cannot correct them.

Bernanke advocated that Americans spend less and save more, while countries using export-led growth strategies should shift more to domestic demand instead. But only government intervention can change these modes of behavior. Bernanke's sole policy prescription was to reduce federal budget deficits, but even if accomplished, this would not be sufficient to balance trade. Congress attempted to constrain the transmission of federal spending into increased imports with "Buy America" provisions in the stimulus bill, but President Barack Obama raised objections to this as a general policy.

Reducing the deficit by increasing exports is beyond the reach of national policy. Foreign governments will not allow their markets to be overrun. U.S. exports would have to increase by more than 50 percent to balance the trade account. The U.S. trade deficit for 20052008 averaged more than $700 billion annually. Dollar devaluation, the "free trade" remedy, has failed and cannot go further without threatening the global role of the dollar. From 20012008, the Federal Reserve trade-weighted dollar index declined from 130 to 96 without stemming the trade deficit.

Restrictions on U.S. imports will evolve slowly, but the trend is inevitable. There will be more energetic enforcement of trade laws against dumping and other predatory behavior, and less emphasis on broad trade liberalization efforts like the Doha Bound. These moves should not, however, be of great concern for Latin America. Indeed, the region could benefit from an American focus on the main source of its trade problem: Asia.

A general retreat on "free trade" will mean a greater advantage to those who have bilateral or multilateral trade agreements. Under NAFTA, Mexico may regain ground lost to Chinese rivals. Beijing will be the primary target of any U.S. policy change for strategic as well as economic reasons. In 2007, the U.S. merchandise trade deficit was $262 billion with China, but only $108 billion with all of Latin America, and $39.9 billion of this was oil from Venezuela.

CAFTA's approval in an otherwise skeptical Congress was based on giving the region a competitive edge over China. The Chile FTA has performed well, with trade expanding with only a small U.S. deficit. And there are FTAs pending with Colombia and Panama.

In the long run, Latin America needs to boost intraregional trade and integration to expand industry and services and improve living standards. It can learn a different lesson from Asia than export dependency on the West. While the smaller countries have suffered greatly from the decline in world trade, the larger countries, China, India and Indonesia, have recovered faster because of their large internal markets. Brazil and Argentina did not decline as much as trade-dependent smaller economies in Asia.

With 280 million people, the nine full and associate member nations of Mercosur have the size to support internal development and are showing signs of recovery. The group still needs to overcome local rivalries, as the European Union has been doing. It also needs to unite against two major threats: populist regimes whose economic policies are untenable and Chinese penetration that keeps Latin America overly tied to raw materials production for export rather than broad-based economic progress beneficial to society at large.

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Corporate-driven globalism in the chaos of international anarchy has failed. As the United States is forced to rebalance its economy, other major powers will have to do the same. State policies to secure markets and attract capital for local growth are essential. If done properly, all can emerge stronger with more sustainable results.

William R. Hawkins is a consultant specializing in international economic and national security issues.
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Title Annotation:THE SCENE
Author:Hawkins, William R.
Publication:Latin Trade
Date:Nov 1, 2009
Words:775
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