MNI INTERVIEW:Global Rebalancing Has No Easy Solution - Pettis

Washington faces no easy path to revitalising domestic manufacturing through resolving global trade and capital imbalances, while current policies focused largely on bilateral tariffs against China are unlikely to resolve the deeper structural drivers of U.S. deficits, a leading economist told MNI.

History shows rebalancing between surplus and deficit nations – such as during the 1930s or the 1970s – is inevitably disruptive, said Michael Pettis, professor of finance at Peking University's Guanghua School of Management.

Although Pettis has argued for capital controls as a more efficient tool than tariffs in preventing surplus nations from exporting domestic imbalances to deficit countries such as the U.S., he acknowledges that any adjustment mechanism cannot be painless.

“The case for action is not that things will immediately improve, but rather that without adjustment, the situation will continue to deteriorate,” Pettis said, highlighting China’s 12.4% jump in March exports while inbound shipments fell 4.3%.

While analysts attributed the export spike to front-loading, as companies rushed to avoid incoming higher tariff rates, Pettis noted that this did not account for the drop in imports – an indication, he said, that structural imbalances may be deepening.

Placing a tax on U.S. capital inflows would curb the short-term movements that underpin the harmful effects of dollar dominance on American manufacturing, without deterring long-term investment in productive assets like factories and machinery, Pettis argued.

CHINA EXPORTS

Washington’s recent targeting of China with a 145% tariff rate, while taking a lighter approach against other surplus partners such as the EU and Japan, meant U.S. net imports would not decline much and allow Beijing’s exports to surprise to the upside. “I expect more resilience in China’s export data this year than is expected, although growth may slow later in the year as tariffs take some effect,” he said, noting China would likely partially offset falling exports to the U.S. with higher shipments to Washington’s other net-exporting partners not yet heavily targeted by tariffs.

While exports are expected to maintain year-on-year growth, net exports – the component that directly contributes to GDP – will slow compared to last year, when they added 1.5 percentage points to the overall 5% expansion, he said.

U.S.’s continued policy of granting unfettered foreign access to its capital markets perpetuates global demand imbalances by allowing surplus economies, such as China, to recycle excess savings into U.S. financial assets, rather than undertaking adjustments through stronger domestic consumption, he argued.

Beijing’s efforts to offset declining U.S. sales by encouraging exporters to shift sales to domestic demand are unlikely to succeed in the absence of a corresponding increase in household income to support domestic consumption, Pettis continued. “They are not doing the arithmetic, you cannot increase domestic consumption for your exports in a sustainable manner if you don’t sustainably increase household wealth,” he said.