Exceptional policy support prevented a global economic depression, even as the pandemic took a heavy toll on lives and livelihoods. The global reaction, as seen in major shifts in travel, consumption, and trade, also made the world a more economically imbalanced place as reflected in current account balances—a record of a country’s transactions with the rest of the world.

In our latest External Sector Report we found that the global reaction to the pandemic further widened global current account balances—the sum of absolute deficits and surpluses among all countries—from 2.8 percent of world GDP in 2019 to 3.2 percent of GDP in 2020. Those balances are set to widen further as the pandemic continues to rage in much of the world.

If not for the crisis, global current account balances would have continued to decline. While external deficits and surpluses are not necessarily a cause for concern, excessive imbalances—larger than warranted by the economy’s fundamentals and appropriate economic policies—can have destabilizing effects on economies by fueling trade tensions and increasing the likelihood of disruptive asset price adjustments.

A year like no other

The dramatic fluctuations in current account deficits and surpluses in 2020 were driven by four major pandemic-fueled trends:

• Travel declined: The pandemic led to a sharp decrease in tourism and travel. This had a significant negative impact on the account balances of countries that rely on tourism revenue, such as Spain, Thailand, Turkey, and even larger consequences for smaller tourism-dependent economies.
• Oil demand collapsed: The collapse in oil demand and energy prices was relatively short lived, with oil prices recovering in the second half of 2020. However, oil-exporting economies, such as Saudi Arabia and Russia, saw current account balances decline sharply in 2020. Oil-importing countries saw corresponding increases to their oil trade balances.
• Medical products trade boomed: Demand surged by about 30 percent for medical supplies critical for fighting the pandemic, such as personal protective equipment, as well as the inputs and materials to make them, with implications for importers and exporters of these items.
• Household consumption shifted: As people were forced to stay home, households shifted their consumption away from services toward consumer goods. This happened most in advanced economies where there was an increase in the purchase of durable goods like electrical appliances used to accommodate teleworking and virtual learning.

All of these factors contributed to some countries seeing a wider current account deficit, meaning they bought more than they sold, or a larger current account surplus, meaning they sold more than they bought. Favorable global financial conditions, with the unprecedented monetary policy support from major central banks, made it easier for countries to finance wider current account deficits. In contrast, during past crises where financial conditions sharply tightened, running current account deficits was harder, pushing countries further into recession.

On top of these external factors, the pandemic led to massive government borrowing to finance health care and provide economic support to households and firms, creating large uneven effects on trade balances.

The outlook

Global current account balances are set to widen even further in 2021 but this trend is not expected to last. The latest IMF staff forecasts indicate that global current account balances will narrow in the coming years, as China’s surplus and the US’ deficit falls, reaching 2.5 percent of world GDP by 2026.

A reduction in balances could be delayed if large deficit economies like the US undertake additional fiscal expansions or there is a faster-than-expected fiscal adjustment in current account surplus countries, like Germany. A resurgence of the pandemic and a tightening of global financial conditions that disrupt the flow of capital to emerging markets and developing economies could also affect balances.

Despite the shock of the crisis and possibly due to its worldwide impact, excessive current account deficits and surpluses were broadly unchanged in 2020, representing about 1.2 percent of world GDP. Most of the drivers of excess external imbalances pre-date the pandemic and include fiscal imbalances as well as structural and competitiveness distortions.

Rebalancing the world economy

Ending the pandemic for everyone in the world is the only way to ensure a global economic recovery that prevents further divergence. This will require a global effort to help countries secure financing for vaccinations and maintain healthcare.

A synchronized global investment push or a synchronized health spending push to end the pandemic and support the recovery could have large effects on world growth without raising global balances.

Governments should step up efforts to resolve trade and technology tensions and modernize international taxation. A top priority should be the phasing out of tariff and non-tariff barriers, especially on medical products.

Countries with excess current account deficits should, where appropriate, seek to reduce budget deficits over the medium term and make competitiveness-raising reforms, including in education and innovation policies. In economies with excess current account surpluses and remaining fiscal space, policies should support the recovery and medium-term growth, including through greater public investment.

In the years to come, countries will need to simultaneously rebalance, while ensuring that the recovery is built on a solid and durable foundation.

To read the full commentary from IMF Blogs, please click here. 

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Many people know about ITA’s efforts to promote exports overseas, but ITA is also home to the Enforcement and Compliance (E&C) Unit, which administers trade remedies on imported products that are designed to rebalance the international trading system in the face of unfair trade practices like dumping or unfair pricing.

E&C teams are charged with the critical responsibility to take action when unfair trade practices threaten American competitiveness. The strongest tool that we use to maintain healthy competition in international trade is enforcing U.S. trade remedy statutes, which authorize E&C to investigate and, if necessary, apply antidumping (AD) and countervailing duties (CVD). But what, exactly, are antidumping and countervailing duties, how do they work, and why are they essential to a balanced system of global trade?

Antidumping duties are imposed when a foreign company undervalues its product when selling in the American market; countervailing duties are enacted when foreign governments provide unfair subsidies to an industry, which can result in artificially low prices for imports. These unfair trade practices have the potential to damage the competing U.S. industry. Some industries may be large enough to weather the damages caused by undervalued imports, but small and medium sized businesses are often unable to do so and therefore need effective relief from unfairly traded goods. The U.S. currently has AD/CVD duties in effect on 597 products from around the world – 37 percent of them cover products imported from China, and it is estimated that in recent years, the United States collected approximately $2.3 billion as a result of AD/CVDs. These trade remedies stabilize the market and hold foreign governments responsible for conducting trade in a fair and equitable manner.

Our trade remedy actions are bolstered by the work done by E&C’s Trade Agreements Negotiations and Compliance team which works with foreign governments on behalf of American companies to remove technical barriers to trade, and the Foreign-Trade Zones program which provides companies with a range of benefits, including streamlined customs procedures, to keep their business in the United States.

As our economy begins to rebound from the devastation brought on by the COVID-19 pandemic, trade remedies are essential component of building back better. They defend American jobs, help level the playing field for American businesses and industries, and contribute to a fair and equitable international trading system. If you’d like to learn more about the AD/CVD duties, please visit ITA’s webpage on U.S. Antidumping and Countervailing Duties.

Eric Anderson and Ava Jamerson are International Trade Specialists in the Enforcement & Compliance Office of Communications.

To read the original blog by the International Trade Administration, please visit here

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Bilateral trade balances (the difference in the value of exports and imports between two countries) have come under scrutiny recently. Some policymakers are concerned that their large and rising size are the result of uneven measures that distort international trade. But is a focus on bilateral trade balances the right one?

The short answer is no. Our research in Chapter 4 of the April 2019 World Economic Outlook finds that a tariff-induced change in a specific trade balance between two countries tends to be offset by changes in bilateral balances with other partners through trade diversion, with little or no impact on the aggregate trade balance (the sum of all the bilateral trade balances).

Instead what drives trade is macroeconomics. We find that most of the changes in bilateral trade balances over the past two decades were explained by the combined effect of macroeconomic factors—which include fiscal policy, credit cycles, and, in some cases, exchange rate policies and widespread subsidies to tradable sectors. In contrast, changes in tariffs played a much smaller role.

This does not mean that tariffs do not hurt countries. In the context of a global economy characterized by global value chains (where production is carried out across multiple countries), sharp increases in tariffs can create significant long-term economic costs and ripple effects, leaving the global economy worse off.

Economic forces explain bilateral trade balances

Our work—based on a study of 63 countries over 20 years and across 34 sectors—sets out to understand and quantify the drivers of changes in bilateral trade balances. It does so by distinguishing between the roles of macroeconomic factors, tariffs, and the international organization of production—in part reflected in the sectoral composition of countries’ production and demand (for example, manufacturing, services, or agriculture).

We find that the evolution of bilateral balances over the past two decades has been, to a significant extent, driven by macroeconomic forces that are also known to determine aggregate trade balances. These factors include fiscal policy, demographics, and weak domestic demand, but they may also include exchange rate policies and domestic supply-side policies, like subsidies to state-owned enterprises or to export sectors.

In contrast, changes in bilateral tariffs played a smaller role, reflecting their already low levels in many countries and the fact that reciprocal tariff reductions had offsetting effects on bilateral trade balances. The chart shows the contribution of each of these factors in the evolution of bilateral trade balances for some large country-pairs. For example, macroeconomic factors accounted for about 20 percent of the change in the US-Germany trade balance over 1995-2015 but over 95 percent of the change in the US-China trade balance.

A closer look at tariffs and their spillovers

While our analysis finds that the direct impact of tariffs on the evolution of bilateral trade balances has been small relative to macroeconomic factors, this doesn’t mean that tariffs don’t matter. In the longer term, large and sustained changes in tariffs can shape the international organization of production as firms adjust domestic and international investment and production structuring, such as organizing themselves into global value chains—the different processes in different parts of the world that each add value to the goods and service being produced.

Since the mid-1990s, the significant decline in trade costs—that is, tariffs and transportation and communications costs—has gone together with an increase in the extent and complexity of global value chains. This has allowed countries to become more productive and create jobs.

The integrated nature of the current global trade system suggests that a sharp increase in tariffs would impact countries and create a ripple effect from one another, leaving the world economy worse off. We find that increases in tariffs would particularly hurt output, jobs, and productivity, not only for those economies directly imposing and facing them, but also for other countries up and down the value chains.

For most countries, the negative effect of a generalized 1 percentage point increase in manufacturing tariffs (not accounting for any feedback effects) is larger today than it would have been in 1995. In the case of Germany and Korea—countries with large manufacturing sectors that are particularly highly integrated into global supply chains—the difference is about 0.5 and 0.6 percent of GDP, respectively.  

When tariff increases are targeted to specific partners (instead of being deployed across the board), some countries may benefit from trade diversion as the demand from the country imposing the tariff is switched to countries that face no tariffs. Hence, changes in the bilateral trade balance with specific partners, triggered by bilateral tariffs, tend to be offset by changes in bilateral trade balances with other trade partners, leaving the aggregate trade balance broadly unchanged.

Policy implications

These findings support two main policy conclusions.

First, the discussion of trade balances should focus on macroeconomic factors, which tend to determine aggregate trade balances. Policymakers are well advised to avoid distortive macroeconomic policies such as procyclical fiscal policy (providing stimulus when demand is already strong) or heavily subsidizing exporting sectors that create excessive—and possibly unsustainable—imbalances. Unless there are changes in macroeconomic policies, targeting particular bilateral trade balances will likely only lead to trade diversion and offsetting changes in trade balances with other partners, leaving the country’s aggregate balance little changed.

Second, multilateral reductions of tariffs and other non-tariff barriers (for example, of import quotas or varying product standards across countries) will benefit trade and, over the longer term, improve economic outcomes. Policymakers should continue to promote free and fair trade by undoing recently enacted tariffs and enhancing efforts to reduce existing barriers to trade.

At the same time, it is critical to recognize that trade liberalization—like technological progress—can impose costly adjustment for some groups of workers and communities. Putting in place policies such as retraining and job search assistance programs, adequate social safety nets and redistributive tax-benefit systems can help ensure that the gains from trade are more widely shared and individuals or groups left behind are adequately protected.

Johannes Eugster is an Economist in the Multilateral Surveillance Division of the IMF’s Research Department, working mostly on international spillovers and G20 related issues. 

Florence Jaumotte is a Deputy Division Chief in the IMF’s Research Department. 

Margaux MacDonald  is an Economist in the Research Department of the IMF where she works in the Multilateral Surveillance Division.

Roberto Piazza is an Economist in the Fiscal Affairs Department of the IMF where he works in the Fiscal Policy and Surveillance Division.

To read the original blog by IMF Blogs, please click here.

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