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External orientation still the way to go despite external headwinds

Comments on Alok Sheel "China, India and global headwinds", 25/08/2015

The GFC and its aftermaths exposed some weaknesses of high exposure of those economies to external demand/trade through external shocks in economics weakening. Due to the weakening of many industrial economies and their desire to get out of the weaknesses, the so called imbalances became very fashionable, because some industrial economies with trade deficits could get a boost if their trade deficits were reduced. China was a big target or a case of the imbalances.

Willingly or not, trade imbalances may have been reduced over the past few years. Adjustments of trade imbalances may or may not be optimal to the world economy as a whole or any pair of countries which have bilateral trade imbalance. For example, Australia is generally a capital importing country and trade deficits may be needed to balance its capital needs.

Even in a country that my not always need external capitals, from time to time it may be beneficial to use external capitals. In such cases, trade deficits may de desirable.

Furthermore, differential technical changes and productivity rises between countries may cause trade imbalance that may need a period of optimally transitional adjustment that can take relatively long time to complete.

The lessons from the GFC and its aftermaths is not turning to inward looking and deliberately reduce external trade. The lessons should be explore every part of demands, both internal and external to boost growth. It would be a costly mistake to give up external orientation in the age of globalisation and economic integration and to only focus on internal demand. Any reduction of trade to GDP ratio should be based on fully explore both internal and external demand, as opposed to purely internal orientation.

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