Global Imbalances: Trade Effects and Policy Challenges

The search for balanced, sustainable growth clearly involves the unwinding of large and persistent global imbalances. Much of the attention in the rebalancing debate has centred on how shifts in monetary and fiscal policies affect current account imbalances. This paper goes beyond macroeconomic management considerations and exchange rate realignments to assess how one type of structural policy reform – namely trade and trade-related policy reforms – may facilitate global rebalancing. In addition, the paper analyses how might various rebalancing scenarios, even if they do not explicitly include major trade policy reforms, impact global trade. Our analysis suggests that a co-ordinated response involving macroeconomic, exchange rate and structural reforms, including trade policy reforms, are needed to address imbalances in the global economy. Trade is a part of the solution since trade policy distortions reduce the benefits from trade and, through their effects on relative prices, jointly influence economic incentives on both the trade balance and net national savings sides of the national savings-investment identity. In particular, since some imbalances stem from the asymmetric pattern of remaining protectionism in goods and services sectors, a balanced approach to trade policy reform could facilitate the global adjustment process.