I wrote about China’s focus on rebalancing its economy several days ago. For anyone not bored to tears by that post, you should take a look at this fine column by Robert Samuelson in the Washington Post on the falling U.S. dollar. Samuelson is one of the best economics columnists that not only can write accurately about complex macroeconomic topics but can do so in a very accessible way. His first paragraph sets the stage for an interesting discussion:

Let’s face it. Foreign exchange markets are not mass entertainment. They’re not the NFL, MTV or MySpace. So you might have missed the latest excitement of the sliding dollar. Who cares if the euro is now worth $1.33 instead of the $1.28 it was worth on Nov. 20 — a 4 percent loss for the dollar? Well, we all should. The dollar’s mysterious movements pose one of the thorniest economic questions of our time: Can the world economy thrive without the massive stimulus of ever-increasing U.S. trade deficits?

Certainly China, among other countries, has benefitted tremendously from its bilateral trade surplus with the U.S. Chinese exporters have done very well, and American consumers have been flocking to Walmart for many years to buy cheap imported goods. U.S. manufacturers? – not so happy. (See my post yesterday on the complaints raised by John Engler and the NAM.)

The issue Samuelson brings up, a topic he has returned to many times in recent years, is the unsustainability of global imbalances. Part of his column is a very useful introduction to why the dollar is the global reserve currency and what that means in practical terms. He then goes on to explain why this situation is not stable and that change may be imminent. This is a subject that has been discussed for some time now and will probably continue being a hot topic as long as global imbalances persist.

No one knows when these imbalances will be corrected and how ugly the process will be for countries like China. There is certainly a case to be made for a painful transition:

Economists talk glibly about "rebalancing" the world economy. That means that export-dependent nations would rely more on domestic growth, and deficit countries — mainly the United States — would shift to more exports.

It sounds easy, but, especially for major exporters, the needed changes go well beyond twisting a few simple economic dials. They involve altering government policies, industrial structures and even popular attitudes. It’s unclear whether these changes can be made. If not, a weak dollar might herald a weak global economy — which would be bad for everyone.

Which takes us back to my post on China’s new direction for economic reform, the rebalancing of the economy to narrow the income gap, shifting from a manufacturing-based economy to one that is more oriented on the service sector, increasing domestic consumption, and promoting innovation. Add to this China’s trade diversification, an attempt to increase trade with areas like Latin America and Africa. This is being done for a variety of reasons, but should this policy provide a small cushion against future decreases in U.S. demand for imports, all the better.

Samuelson does not discuss China’s domestic economic policy, but the question remains whether these policies, in connection with a declining dollar and (perhaps) a continuing liberalization of China’s exchange rate mechanism will be sufficient to reverse the bilateral trade imbalance. If so, this would represent a very positive development to solving the larger global challenge.