One of the biggest worries of the 21st century -- the vast imbalances in global trade and capital flows that helped cause the financial cataclysm of 2008 -- has largely fallen off the radar of the world’s economic policy makers.

Unless they take the measures needed to get trade flows under control, it will be back.

The issue has gone quiet because global imbalances have eased, as Bloomberg Markets reports in its latest issue. The vast U.S. trade deficit, and the foreign borrowing required to finance it, have shrunk. The International Monetary Fund expects the U.S. current-account deficit -- a measure of trade and financial flows -- to hold at 3.1 percent of gross domestic product next year, about half its peak in 2006.

On the other side of the globe, China’s role as exporter to the world has also diminished. The country’s current-account surplus is set to drop to 2.5 percent of GDP in 2013, from a high of 10.1 percent in 2007. As a result, China has fewer dollars that it needs to park in U.S. Treasuries and other investments, curbing the destabilizing flows of capital that contributed to the financial crisis.

The trouble is, the improvement is driven as much by temporary factors as by structural changes and lasting reforms. Slumping demand has squeezed imports in deficit countries such as the U.S., naturally reducing their trading partners’ exports. Eventually demand and global trade will recover. When they do, the imbalances are likely to return.

Balancing Trade

Economic models suggest that exchange rates need to rise further in surplus countries, and fall further in deficit countries, to keep trade imbalances in check. Currency adjustment still has an especially big part to play in China, despite that country’s efforts to allow a gradual strengthening of the renminbi.

The most useful changes, though, have to begin at home, wherever that happens to be. Over the medium term, deficit countries need to curb public borrowing and labor costs, and surplus countries need to boost domestic demand. There’s a self-interested case to be made for such reforms. If deficit countries balance their budgets, they become less vulnerable to financial malaise. Lower labor costs raise employment as well as export competitiveness. Boosting domestic demand -- in China’s case, by developing a more generous social safety net -- can directly raise living standards.

So far, the U.S. and China have made little progress. The first faces significant resistance to higher taxes and lower government spending. The second fears the dislocation that relying less on exports would involve.

The test is political. If governments fail it, you haven’t heard the last of global imbalances.

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