Recycling Trade Surpluses: Policy Options for Taipei, China

Trade imbalance contributes to economic growth in two different ways, depending on the relative position of saving and investment. For a trade surplus economy, where there is excess of saving over domestic investment, the surplus provides the economy with additional demand, preventing production and employment from declining; while for a trade deficit economy, where there is insufficient saving, the deficit brings in additional resources to help finance domestic investment. If every economy is to balance its trade with the rest of the world, its growth rate then would be limited by the smaller of the two factors, saving and investment, and the whole world economy would shrink…