ISAS Insights

The growing trade disparity between the world's two largest economies, the United States and China, is often seen as the genesis of the current global imbalance, which exploded in 2007 with the onset of the financial crisis in the United States and the resultant worldwide economic recession. In other words, the crisis was caused by three interlinked factors - high liquidity (in turn, catalysed by imbalances in payments), high leverage and regulatory oversight. Many solutions for unwinding the global imbalance have been proposed, requiring nations to moderate production and consumption imbalances and calling for financial sector regulations and reforms. However, the issue which needs to be put into the centre of domestic reform policies is that of managing the changing relative competitiveness of nations. This change needs to be reflected especially in the world's largest economy, viz. the United States.