The United States is spending too much while the rest of the world is spending too little. The result is a global savings glut in which lies the root cause of the escalating US trade deficit, according to Ben Bernanke, the chairman designate of the US Federal Reserve.

If that is indeed the case, and we have no reason to doubt Dr Bernanke's wisdom, the world's importing and exporting countries might have been fighting over all the wrong issues in the ongoing trade disputes.

We have always believed that the large and growing US trade deficit with China cannot be addressed by trade restrictions, the revaluation of the renminbi, or export quotas.

This is because any resulting increase in the price of Chinese exports to the United States should be small compared to the US importers' wide profit margins at the retail level. They should have no problem absorbing the price hike if they see more benefits in increasing sales volume.

Let's consider Dr Bernanke's point. China's savings rate at over 40 percent is among the world's highest, while the United States has a savings rate of about zero. Such a comparison, by itself, is meaningless because of the vastly different political, social and economic systems of the two countries. But these savings rates show up the vast difference in spending patterns that underscore the large trade imbalance, which has become a focal point of dispute between the two trading partners.

Many US economists have been calling on the government to cut the federal budget deficit which has been mounting since the beginning of the Iraq war. Liberal government spending has the effect of stimulating domestic economic activities, which, in turn, is sucking in huge amounts of imports.

A large trade deficit, in itself, is not necessarily a bad thing. In fact, foreign trade in total accounts for only a small part of the US economy. What's more, the US balance of payment on the national level has remained healthy because of the continued large inflow of foreign capital, including much of the accumulated surplus of its trading partners.

But the enlarging trade deficit has posed a worrisome question of whether the spending boon, driven by the budget deficit, is sustainable. Indeed, the symptom of an economic bubble has already surfaced in the form of escalating housing prices. Some US economists are already calling on the Fed to act by removing the proverbial punch bowl.

In a way, China is taking action that could have the effect of addressing the root issue of its growing trade surplus with the United States. In the past several years, the central government has been trying to balance the nation's economic growth by pushing for an increase in gross domestic consumption.

At present, economic growth is largely driven by an increase in exports. This could expose the economy to external risks, including rising trade protectionism and raw material supply, that are outside the control of the government and domestic enterprises.

The government can fine-tune economic growth either through administrative measures or by adjusting the level of public spending on infrastructure developments. In addition, a number of new policies are expected to have the effect of promoting consumer spending. They include the move to raise the tax threshold, continuous liberalization of the banking sector leading to the increase in consumer credit products and the further opening of the retail sector to foreign participation under the World Trade Organization arrangement.

But any substantial change in the consumer spending pattern on the mainland can only happen when consumers feel sufficiently secure about their future. Although confidence about future economic growth has remained high, many mainland salary earners still have too many worries about medical expenses in case they and their family members fall sick, job security in a fast changing business environment and, in the longer term, savings for retirement.

Many mainland economists hold the view that real balanced economic growth will remain an elusive goal unless the government, together with the many State and privately-owned enterprises, can come up with a comprehensive and equitable social security system that is seen by the public as effective in protecting them against various contingencies.

The government must take the initiative in establishing a workable social security system. But it will need the co-operation of the business sector, which should find it in its benefit to take an active role in such an undertaking.

Bernanke and others understand that large-scale trade imbalance is rooted in much wider economic issues that go way beyond the simple exchange of goods and services. Trade barriers are the most ineffectual way of addressing these issues.

(China Daily November 8, 2005)