Federal Reserve Chairman Ben Bernanke warned a gathering in Santa Barbara on Oct. 19 that Asia’s new export policies could lead to renewed trade imbalances if the U.S. doesn’t work with trade partners across the Pacific.
In an event under tight security wraps at the Bacara Resort & Spa, Bernanke said that low interest rates and big stimulus packages have helped Asian countries deal with the recession by boosting domestic demand. But that could stall Asian demand for U.S. products, and if the United States wants durable growth and financial stability, it “must avoid ever-increasing and unsustainable imbalances in trade and capital flows,” Bernanke said, according to prepared remarks released by the Federal Reserve.
Bernanke’s speech came soon after reports that the U.S. trade deficit unexpectedly narrowed to $30.7 billion in August.
Bernanke said that for now, Asian countries look to be weathering the global financial crisis well because of growth in domestic demand supported by aggressive fiscal and monetary policies. But what’s significant about that for the United States, Bernanke said, is that it means those countries aren’t continuing to increase their demand for foreign goods, including from the U.S.
Bernanke related the most recent economic crisis to the Asian financial crisis of the 1990s. “Because strong export markets helped Asia recover from that crisis, and because many countries in the region were badly hurt by sharp reversals in capital flows, the crisis strengthened Asia’s commitment to export-led growth, backed up with large current account surpluses and mounting foreign exchange reserves,” he said.
That model has served Asia well in many respects because it has led to rapid growth, Bernanke said. But, he warned, such “surplus countries” must now “act to narrow the gap between saving and investment and raise domestic demand” or face so-called trade imbalances.
Meanwhile, the U.S. should also increase its national savings rate and work to reduce federal deficits over time, Bernanke said.
• See the Oct. 23 print edition of the paper for the in-depth story.