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Experts Discuss Global Imbalances and the U.S. Dollar
Michael Knetter, dean of the Wisconsin School of Business and Executive Director of the UW CIBER, delivered the keynote address.
Prominent financial and policy experts drew an audience of nearly 70 representatives of Wisconsin businesses and financial organizations at a May conference, Global Imbalances and the U.S. Dollar: Doing Business in the World Economy. The event was held at UW-Madison’s Fluno Center for Executive Education.
The keynote speaker was Michael Knetter, dean of the Wisconsin School of Business, who noted that trade deficits are not good or bad per se and that the U.S. trade deficit should not be cause for alarm. It is to be expected, he said, that a country with well-functioning markets and good information would export assets and import goods and services. Knetter did caution about the impact of lax credit conditions on the U.S. economy, particularly in the mortgage industry. This situation, he said, could erode confidence in the U.S. dollar as a reserve currency and could damage investment banking, a key U.S. export industry.
The first panel addressed global imbalances and currencies and how they affect U.S. businesses. Catherine Mann, professor of economics at Brandeis University and senior fellow at the Peter G. Peterson Institute for International Economics, said that dollar depreciation in recent years has led to greater price competitiveness of U.S. exports. She pointed to growth in Wisconsin exports, particularly in non-European markets. Mann noted that dollar depreciation has resulted in a slight decrease in the price of Asian imports over the past five years, while prices of European imports have risen by 30 percent. This increase has had a negative impact on domestic buyers and a positive impact on domestic competitors while contributing to inflation in the U.S. market.
Michael Melvin, managing director and head of currency research at Barclay’s Global Investors, noted that currencies should depreciate in countries with current account deficits, as is happening in the U.S. Asian countries keep their currencies from appreciating against the dollar, he said, by buying large amounts of dollars and accumulating foreign reserves. If these countries were to pour their dollars into the international market, the value of the dollar would plummet, but Melvin considers such action unlikely. He said that the dollar constitutes 64 percent of the world’s foreign reserve holdings and the euro only 26 percent. The dollar remains popular because of its liquidity and the number of dollar-based investment opportunities. In Melvin’s view, the euro is unlikely to replace the dollar any time soon, although he conceded that poor U.S. policy decisions could drive the markets in this direction.
The second panel was titled, “The United States, China and the Policy Choices.” Jeffrey Frankel, James W. Harpel Professor at Harvard University’s Kennedy School of Government, questioned whether the U.S. trade deficit is sustainable. He noted that the U.S. trade deficit has reached a record level and is being financed by China’s central bank. This arrangement has supported China’s export-led growth but is not sustainable in an environment of high capital mobility. Also, China will eventually need to develop a domestic financial system to avoid suffering a financial crisis, he said, and as this system develops, the excess liquidity pouring from China into the U.S. will end.
Shang-Jin Wei, professor of finance and economics at Columbia University, said that the growth of China’s exports of skilled labor-intensive goods overlaps substantially with exports from industrialized countries. Wei noted that China exports more processed products than other countries and that the domestic content of Chinese exports is quite small. The panelists agreed that China should allow the appreciation of the Chinese currency, noting that such an appreciation will mainly benefit China by keeping domestic inflation under control.
This conference was based on the work of the Current Account Sustainability collaborative, led by Professors Menzie Chinn and Charles Engel with support from the Center for World Affairs and the Global Economy (WAGE). The event was sponsored by WAGE, CIBER, and the La Follette School of Public Affairs. It was co-sponsored by the UW-Madison Department of Economics and European Union Center of Excellence, the Wisconsin Department of Commerce Bureau of Investment and Export, the International Credit Executives Group of Wisconsin, the Madison International Trade Association, and World Trade Center Wisconsin. A podcast of the event is available at wage.wisc.edu.