Sir, Martin Wolf is absolutely correct to argue that targeting current account imbalances is far more effective in rebalancing trade than targeting currencies (“Current account targets are a way back to the future”, November 3). After all, simply forcing a revaluation, for example, of the renminbi will have no effect on the trade imbalance if Beijing responds by reducing real interest rates or expanding socialised credit, both of which it did after the renminbi began revaluing in 2005, and which Tokyo did after the Plaza Accords. In both cases the expansion of cheap credit more than reversed the impact of an appreciating currency, and the trade surplus actually grew, rather than shrank.
But even with a current account target there still is a way to prevent a real rebalancing from taking place – by converting “investment” into “imports”. Suppose that a country with an excessive large current account surplus decides to reduce it by importing and stockpiling a larger amount of commodities. This would lower the current account surplus without having much impact on the trade imbalances.
It would only shift the surplus to the commodity exporters, whose propensity to consume out of additional export revenues may be very low. What’s more, by forcing up the price of commodities, it might actually reduce growth in demand elsewhere. Finally it will also increase the vulnerabilities of both the surplus country and the commodity exporters to commodity volatility and a growth slowdown.