Transpacific Trade Imbalances: Causes and Cures

23 Pages Posted: 15 Aug 2006

See all articles by Jong-Wha Lee

Jong-Wha Lee

Korea University

Warwick J. McKibbin

Australian National University

Yung Chul Park

Korea University - Department of Economics

Abstract

This paper explores the causes of the transpacific trade imbalances using an empirical global model. It also evaluates the impact of various policies to reduce these imbalances. We find the fundamental cause of trade imbalance since 1997 is changes in saving-investment gaps, attributed to the surge of the US fiscal deficits and the decline of East Asia's private investment after the 1997 financial crisis. Our simulation results show that a revaluation of East Asia's exchange rates by 10 per cent (effectively a shift in monetary policy) cannot resolve the imbalances. We find East Asia's concerted efforts to stimulate aggregate demand can have significant impacts on trade balances globally, but the impact on the US trade balance is not large. US fiscal contraction is estimated to have large impacts on the US trade position overall and on the bilateral trade balances with East Asian economies. These results suggest that in order to improve the transpacific imbalance, macroeconomic adjustment will need to be made on both sides of the Pacific.

Suggested Citation

Lee, Jong-Wha and McKibbin, Warwick J. and Park, Yung Chul, Transpacific Trade Imbalances: Causes and Cures. The World Economy, Vol. 29, No. 3, pp. 281-303, March 2006. Available at SSRN: https://ssrn.com/abstract=924286 or http://dx.doi.org/10.1111/j.1467-9701.2006.00783.x

Jong-Wha Lee (Contact Author)

Korea University ( email )

Anam-dong, Sungbuk-Ku
Dept. of Economics
Seoul, 136-701
82-2-3290-2216 (Phone)
82-2-928-4948 (Fax)

Warwick J. McKibbin

Australian National University ( email )

Crawfrod School of Public Policy
Canberra, ACT 2600
Australia
02-61250301 (Phone)
02-62735575 (Fax)

HOME PAGE: http://www.sensiblepolicy.com

Yung Chul Park

Korea University - Department of Economics ( email )

Anam-dong, Sungbuk-Ku
Seoul, 136-701
Korea

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