The Asian Development Bank warns Asian governments to prepare for a possible collapse of the U.S. dollar as the trade gap widens between Asia and its Western trading partners.
The growing U.S. trade deficit has been an issue of global concern for the past few years, but as Asia's foreign exchange reserves rise to about $2 trillion, economists increasingly urge immediate action to correct the imbalance before a crisis occurs.
In a recent report, the Asian Development Bank warned of the danger of a rapid fall in the dollar, should investors lose confidence in the U.S. economy.
Ifzal Ali, the ADB's chief economist, says a fast depreciation of the dollar would lead to a "double whammy" for Asia, which counts the U.S. as a major trading partner.
He says a weak dollar makes Asian exports more expensive in America. At the same time, a likely jump in U.S. interest rates as a result of the depreciation would suppress consumption and lower demand for Asian exports. And, since many Asian countries hold huge amounts U.S. assets, the value of their holdings would fall as the dollar weakened.
Ali adds there is no easy way out of this dilemma, but Asia could start by spending its excess cash. Increased spending by consumers, businesses and governments would cut Asian exports and increase imports. "Asia would have to ride this out," he said. "Domestic demand in terms of both consumption and investment in Asia would have to rise to overcome this kind of situation. But to move to a higher consumption path is going to take a long time because these are deep structural issues."
One problem in encouraging spending is that many Asian countries have limited social safety nets and weak consumer banking services. That means people save huge amounts for their retirements, to buy homes or to educate their children. Many experts say governments must give consumers more confidence in their futures, and more access to affordable credit, before they will spend more.
The ADB notes Southeast Asian governments are trying to spend more but it has yet to make a difference on their current account surpluses. The regional non-profit lender has been promoting the development of Asia's capital markets, where excess liquidity can be invested in bonds and other securities.
China's foreign currency reserves ballooned to $853 billion in February, surpassing Japan to be the biggest holder of foreign currencies in Asia. The U.S. trade deficit expanded more than five percent in January to $68.5 billion from a month earlier.
The United States and other Western countries have been pressuring Asian nations, particularly China, to liberalize their foreign exchange systems to curb trade imbalances. They argue that managed currencies in some countries make Asian exports unfairly cheap. The U.S. Senate is considering a measure to impose high tariffs on China's exports if it does not liberalize the yuan.
China's central bank chief recently said it would take two to three years before the country's trade account would improve, but it may not mean that its huge trade surplus with the U.S. would be corrected by then.
Economist Clyde Prestowitz, a former U.S. commerce advisor, says delay in taking action would only be costly for the global economy. "The longer it goes, the bigger the adjustment is going to be and the more painful the adjustment is going to be at the end of the line, so in a way you should pray for a crisis now," he said.
Ali at the ADB says global cooperation is needed to avert a possible crisis. "It is in nobody's interest to have a disorderly depreciation of the dollar," he notes. "So I think globally there would enough actions taken that this would not happen."
Some economists have raised the possibility of coordinated policy action to correct the imbalance similar to the 1985 Plaza Accord that led to the appreciation of the Japanese yen and helped revive the U.S. economy and trim its trade deficit. But so far, no such initiative has been set into motion.