The White House released a letter asking the world's strongest countries to bring some sanity to the trade imbalances that could threaten global stability.
Countries like the United States are interested in correcting our deep trade imbalance because with a slow consumer market, we need more support from overseas spending. Countries like China and Germany are interested in preserving their trade imbalances because a lower domestic consumer demand plus a cheap currency means foreign countries buy their goods and lift their economies.
The letter calls on countries running persistent trade deficits (countries like the United States and many developed countries) to increase national savings, adopt medium-term fiscal targets and increase exports. It also calls on countries running consistent trade surpluses (like China and Germany) to "undertake structural, fiscal, and exchange rate policies" to boost domestic demand.
More pointedly, the letter asks nations to "refrain from exchange rate policies designed to achieve competitive advantage by either weakening their currency or preventing appreciation of an undervalued currency." In short: We're watching you, China.
Unsurprisingly, countries running trade deficits have come out in support of the letter (including Britain, Canada, Australia, and France). Germany, which is running a trade surplus, expressed "resistance." China has yet to comment. Japan is the only major trade-surplus country that has signed on to the letter, according to the New York Times.
Germany benefits from high domestic savings and relatively cheap Euro. That makes foreign demand relatively stronger against domestic demand, which boosts its exports. China is deliberately buying up dollars to drive down the price of its currency for the same reason -- to drive foreign demand for its cheap, cheap goods. The United States wants to make the case that higher currencies worldwide means more valuable global consumers and higher overall world trade. But it will be difficult to make this case to countries that like current trade imbalances very close to where they are.
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