Keynes’ Other Solution: Trade Imbalance

The name of John Maynard Keynes, the famous British economist, came up in a new context recently. Most often he is referenced with regard to his belief that state spending should be increased or decreased as necessary to modify the natural swings in the business cycle. Peter Coy, in a “Businessweek” article, reminded us that Keynes had other concerns and made additional contributions to economic thought.

“The twin threats of deflation and beggar-thy-neighbor currency devaluation have been on the global agenda this year in a way perhaps not seen since 1944, when world leaders met in Bretton Woods, N.H., to build the postwar, post-Depression financial architecture that included the International Monetary Fund. Now as then, the issue is what to do about chronic trade imbalances that threaten global economic stability. Geithner's team prepared for the G-20 meeting by dusting off the IMF's founding document, which includes, as the secretary noted in an Oct. 6 speech in Washington, "a now-obscure paragraph" requiring the Fund to investigate countries with chronic trade surpluses and recommend how to shrink them. Finishing the thought in Gyeongju, he advocated a 4 percent limit on the size of countries' trade surpluses as a share of their economic output.”

“In so doing, Geithner was playing a role made famous in the 1940s by the British economist John Maynard Keynes. Geithner warned in Gyeongju, as he has many times before, that global growth will be hindered if indebted nations are forced to bear the full brunt of correcting imbalances. He urged surplus nations to shift ‘away from export dependence and toward stronger domestic-demand-led growth.’ Keynes said the same thing more ornately in 1942, vowing to ‘offset the contractionist pressure which might otherwise overwhelm in social disorder and disappointment the good hopes of our modern world’.”

What both Keynes and Geithner are saying is that trade works best when flux across boundaries is large and balanced. A situation where there are chronically net exporters or importers is unstable. The net importers will eventually have to curtail and contract and the net exporters will eventually lose their customer base.


The “now obscure paragraph” referred to was inserted in the IMF charter at the insistence of Keynes and his British colleagues. At the time Britain was the great debtor nation. Now that the United States is the great debtor nation, it seems appropriate, although perhaps ironic, that Geithner re-raise the issue.


I found the data in the chart below surprising. The data was from an IMF source. Figures from 2007 were used in order to avoid recession-driven peculiarities. Oil exporting nations were not included.

Two nations seem to exceed Geithner’s four percent criteria: Germany and China. The numbers from China were as expected. However, I was surprised at how much of Germany’s economy depended on trade, and the fact that it was even more dependent than China. I am totally confused about Japan. It is described as an export-driven economy troubled by low internal demand. Yet, its export numbers are relatively low and not far out of balance with its imports. One has to assume that its healthy GDP number comes from internal demand.


The issue of trade imbalances will come up again, so stay tuned.

“Geithner didn't get the 4 percent caps—export powerhouses China and Germany shot down the idea, though the U.S. will try again when the G-20 heads of state meet in Seoul on Nov. 11-12. The ministers did make the IMF a cop for bringing trade imbalances under control, and they promised to refrain from competitive devaluation. But they didn't say anything about countries like China, which, although not devaluing, are preventing their currencies from rising.”