Michael Pettis

2/20 From insisting that the the US external account is wholly driven by domestic imbalances, and that the only sustainable way the US can reduce its trade deficit is by reducing the fiscal deficit, he now accepts that the reality is "more nuanced".

3/20 But in getting there he now argues that people like me are wrong to insist that only external factors matter. Of course neither I nor anyone else has ever made that argument. What I've long argued is that the US plays a special role in absorbing global savings imbalances.

4/20 Of course he is right to say internal factors matter, but the fact remain that the US external balance and its internal balance must always be consistent, and that the US external balance must always be consistent with the external balance of the rest of the world.

5/20 Once you begin to accept that foreigners, too, have agency, and that large economies with restricted capital and trade accounts, very large state players, and highly controlled domestic banking systems can control their internal balances, then it becomes...

6/20 much easier to recognize that they also control their external balances, and by controlling their external balances, they effectively export the consequences of their internal balances to the rest of the world.

7/20 These consequences can include not just persistent trade deficits, but also a re-ordering of domestic economies. When large, relatively closed economies structure their internal imbalances, for example, around policies that boost manufacturing at the expense of...

8/20 consumption, a necessary corollary is that the expansion in their share of global manufacturing must be matched by a contraction in the share of global manufacturing of those of their trade partners that absorb their imbalances.

9/20 Obstfeld doesn't address this, of course, but perhaps he thinks it is just coincidence that the manufacturing share of advanced economies that have long run persistent deficits – like the US, France, the UK, Canada, etc. – is well below...

10/20 the global average while the manufacturing share of advanced economies that have long run persistent surpluses – like Japan, South Korea, Germany, Taiwan, etc. – is well above the global average. https://www.phenomenalworld.or...

11/20 But it's not coincidence. In a globalized world, industrial policies implemented in more closed and regulated economies can effectively become the "industrial policies" (in obverse) of more open and less regulated economies. https://carnegieendowment.org/...

12/20 As part of his broader dismissal of foreign agency, Obstfeld asks why, if major reserve currencies lead to trade deficits, doesn't the EU run a trade deficit. But he is looking at the wrong currency.

13/20 The more interesting question should be why, if US economic policies are wholly to blame for net foreign inflows, do other countries with similarly deep, flexible, well-governed and completely open financial markets – like...

14/20 the UK, Canada, and Australia (until recently, before soaring iron prices put it temporarily into surplus) – also run persistent net foreign inflows, trade deficits and manufacturing shares below the global average.

15/20 At any rate, the good news is that American economists are slowly beginning to remember what they used to know, which is that countries can choose between more global integration or more control over their domestic economies.

16/20 Countries that are determined to control their domestic economies will also control their external balances. Countries that are open to external imbalances have less control over their domestic economies. This creates a tension in a globalized world economy, as Joan...

17/20 Robinson explained decades ago. When some large economies choose the former and others the latter, because the former can externalize the costs of domestic imbalances through what she called "beggar thy neighbor" policies, in the end the global trading system...

18/20 must break down as the latter are eventually forced to become like the former. Globalization requires that no major economies try to exert control over their external imbalances. When some do and others don't, globalization falls apart.

19/20 That's why Keynes proposed a global trading system in which countries were limited in their abilities to run external imbalances. These external imbalances, he explained, were just a way to force their trade partners to absorb their own weak domestic demand.

20/20 I am pretty sure that eventually everyone will rediscover the mutual links between the domestic and external balances, and the tension between global integration and national control. Until then, I recommend this book.