Chapter 2: Financial Market Globalization and New Trade Patterns
Page 25 2. Financial Market Globalization and New Trade Patterns Unexpectedly large trade and investment imbalances developed between the US, Japan and others during the 1980s, which have continued through the 1990s. Since 1984, the US has had a trade deficit of more than $100 billion per year, and has received a net inflow of foreign investment of more than $100 billion per year — both of which are now increasing in the wake of the 1997— Asian crisis to approximately $200 billion. Early explanations of these imbalances are found in the proceedings from a conference organized by the Institute for International Economics in late 1990 (Bergsten, ed., 1991), and in the proceedings of the 1990 conference of The International Economics Study Group (Milner and Snowden, 1992). Despite intense focus on this topic by the economics profession, there is still disagreement over the international adjustment mechanisms and key variables that link trade and investment flows. For example, Paul Krugman and many others argue that imbalances in US trade and finance can be appropriately reduced by movements in currency exchange rates and government policy responses such as protectionism: The need to reassess became especially acute in the late 1980s as widespread disappointment emerged over the continuation of sizable imbalances despite large changes in exchange rates and other policy measures aimed at reducing the imbalances … [however] once we clean up the data, it seems possible to argue that trade flows have responded to exchange rates in just about the way that an economist...
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