Prominent national experts from the financial and policy communities drew an audience of nearly 70 representatives of Wisconsin businesses and state financial organizations at a May 1, 2008 conference held at UW-Madison’s Fluno Center for Executive Education.  The half-day conference provided business leaders and other attendees with timely information on important issues in international finance.  Panelists discussed findings from current research on topics including: Will the U.S. trade deficit shrink? Will the value of the dollar continue to fall?  What are the global implications of the U.S. financial distress? And, how do these issues affect Midwest firms competing in the global marketplace?  

The luncheon keynote speaker was Michael Knetter, Dean of the Wisconsin School of Business.  He noted that trade deficits are not good or bad per se and said that the U.S. trade deficit should not be cause for alarm.  In fact, he said, it is to be expected that a country such as the U.S. with well-functioning markets and good information would export assets and import goods and services.  However, Dean Knetter raised a cautionary point about the impact of lax credit conditions on the U.S. economy, particularly in the mortgage industry.  This situation, he said, could erode confidence in the U.S. dollar as a reserve currency and could damage investment banking, a key U.S. export industry, by hurting banks’ credibility.

The first panel session addressed global imbalances and currencies and how they affect U.S. businesses.  Panelist Catherine Mann, Professor of Economics at Brandeis University and Senior Fellow at the Peter G. Peterson Institute for International Economics, discussed the effects of dollar depreciation on U.S. exports and imports.  She cited data that indicate that dollar depreciation in recent years has led to greater price competitiveness of U.S. exports.  In particular, she pointed to growth in Wisconsin exports, particularly in fast growing non-European markets.  On the import side, Professor Mann noted that dollar depreciation has not resulted in uniform price increases. The prices of Asian imports have decreased slightly over the past five years but the prices of European imports, mostly capital goods, have risen by 30 percent.  This increase has had a negative impact on domestic buyers while having a positive impact on domestic competitors.  It has also contributed to inflation in the U.S. market.

Panelist Michael Melvin, Managing Director and Head of Currency Research at Barclay’s Global Investors, discussed current account deficits and currency values.  He noted that currencies should depreciate in countries with current account deficits, and indeed this is happening in the U.S.  According to Dr. Melvin, Asian countries control their currencies to keep them from appreciating against the dollar.  They do this by buying large amounts of dollars and accumulating big foreign reserves.  If these countries were to pour their dollars into the international market, the value of the dollar would definitely plummet, but Dr. Melvin considers it very unlikely that Asian governments would do this.  He said that the dollar constitutes 64 percent of the world’s foreign reserve holdings compared to the Euro which constitutes only 26 percent.  The dollar remains popular because of its liquidity and the number of dollar-based investment opportunities.  In Dr. Melvin’s view, it is unlikely that the Euro will replace the dollar anytime soon, although he conceded that poor U.S. policy decisions could drive the markets in this direction.  As examples of such bad monetary policy, Dr. Melvin and Professor Mann mentioned highly volatile inflation inducing policies and continuous reduction of interest rates.

The second panel was entitled, “The United States, China and the Policy Choices.”  Panelist Jeffrey Frankel, James W. Harpel Professor at Harvard University’s Kennedy School of Government, questioned whether the U.S. trade deficit is sustainable.  He noted that the U.S. trade deficit has reached a record level and is being financed by China’s central bank.  This arrangement has supported China’s export-led growth but is not sustainable in an environment of high capital mobility.  Also, China will eventually need to develop a domestic financial system to avoid suffering a financial crisis.  Professor Frankel cautioned that as this system develops, the excess liquidity pouring from China into the U.S. will end. 

Panelist Shang-Jin Wei, Professor of Finance and Economics at Columbia University, talked about the factor content of Chinese trade.  He cited data that show growth in China’s exports of skilled labor intensive goods which overlap substantially with the exports from industrialized countries.  Professor Wei also noted that China exports more processed products -- products which use many imported inputs -- than other countries.  According to Professor Wei, the domestic content of Chinese exports is still quite small. 

The panelists agreed that China should allow the appreciation of the Chinese currency, the RMB.  They noted that such an appreciation will mainly benefit China, for example by keeping domestic inflation under control.

Please click here to view the speakers’ PowerPoint presentations as well as a podcast of Global Imbalances and the U.S. Dollar: Doing Business in the World Economy.

This conference was based on the work of the Current Account Sustainability collaborative, led by Prof. Menzie Chinn and Prof. Charles Engel with support from the Center for World Affairs and the Global Economy (WAGE).  The event was organized and sponsored by WAGE, the Center for International Business Education and Research (CIBER), and the Robert M. La Follette School of Public Affairs.  It was co-sponsored by the UW-Madison Department of Economics and European Union Center of Excellence, the Wisconsin Department of Commerce Bureau of Investment and Export, the International Credit Executives Group of Wisconsin, the Madison International Trade Association, and World Trade Center Wisconsin.

 

Click here to read an article from WisBusiness.com about keynote speaker Michael Knetter.