The IMF’s America Problem

The IMF’s meeting this spring was lauded as a breakthrough, with officials given a new mandate for “surveillance” of the trade imbalances that contribute significantly to global instability. The new mission is crucially important, both for the health of the global economy and the IMF’s own legitimacy. But is the Fund up to the job?

There is obviously something peculiar about a global financial system in which the richest country in the world, the United States, borrows more than $2 billion a day from poorer countries – even as it lectures them on principles of good governance and fiscal responsibility. So the stakes for the IMF, which is charged with ensuring global financial stability, are high: if other countries eventually lose confidence in an increasingly indebted US, the potential disturbances in the world’s financial markets would be massive.

The task facing the IMF is formidable. It will, of course, be important for the Fund to focus on global imbalances, not bilateral imbalances. In a multilateral trading system, large bilateral trade deficits are often balanced by bilateral surpluses with other countries. China might want oil from the Middle East, but those in the Middle East – with so much wealth concentrated in so few hands – might be more interested in Gucci handbags than in China’s mass-produced goods. So China can have a trade deficit with the Middle East and a trade surplus with the US, but these bilateral balances indicate nothing about China’s overall contribution to global imbalances.

The US is jubilant about its success in expanding the IMF’s role, because it thought that doing so would ratchet up pressure on China. But America’s glee is shortsighted. If one looks at multilateral trade imbalances, the US stands head and shoulders above all others. In 2005, the US trade deficit was $805 billion, while the sum of the surpluses of Europe, Japan, and China was only $325 billion. Any focus on trade imbalances thus should center on the major global imbalance: that of the US.