Ticket to troubled ride
Rich nations are exporting their way to trouble. For eight straight quarters, advanced economies have exported more goods and services than they have imported, suggesting that as a group they are free-riding on world demand, most of which has come from emerging markets. But this growth strategy is both selfish and self-defeating.
There has been quite a change. Between 2004 and 2007 the members of the OECD ran a trade deficit as large as 1.23 percent of their combined GDP, according to a Breakingviews analysis. In the third quarter of 2013, the 34 economies ran a surplus amounting to 0.55 percent of GDP.
The selfishness of the strategy is plain to see. Net exports add to GDP. So when they rise, they create an illusion of economic expansion. And this must be welcome news for countries where domestic consumption and investment are still hardly growing, six years after the 2008 financial crisis.
But the strategy is ultimately self-defeating. Rich countries cannot indefinitely push their wares into developing nations when the buyers have to pay in a currency whose price – in terms of their own home currencies – can jump suddenly because of monetary policy tightening in Washington.
Lenders and investors who make it possible for emerging markets to live beyond their means are always fickle friends. Besides, the emerging economies’ ability to pay is under pressure now. Selling prices for companies exporting from these countries are falling – or not rising quickly enough – because of tepid demand in the West.
The ongoing turmoil in emerging markets will hit the developed world hard. An investment strike in developing nations would make net exports from OECD countries head lower. Ditto if the yuan weakens significantly, reversing some of the growth leeway China has given the rest of the world by reducing its current account surplus from 10 percent of GDP in 2007 to 2.5 percent last year.
Exporting without compensating imports was never a ticket to long term prosperity for the rich world; very soon, even without large-scale trade wars, the strategy will be shown to have been a bankrupt expedient.