by Jamus Jerome Lim (ESSEC Business School and Center for Analytical Finance)
In 2017, the bilateral trade deficit between China and the United States amounted to $375 billion, a staggering amount just shy of what the latter incurred against the rest of the world combined. And not only is this deficit large, it has been remarkably persistent: the chronic imbalance emerged in earnest in 1989, and has persisted for the better part of three decades. Some have even pointed to such imbalances as a contributing factor to the global financial crisis of 2008.
While such massive, chronic imbalances may strike one as artefacts of a modern, hyperglobalised world economy, nothing could be further from the truth. For example, recent economic history records large, persistent imbalances between the United States and Britain during the former’s earlier stages of development. Such imbalances also characterised the rise of Japan following the Second World War.
In recent research, we show that external imbalances between two major economic powers – an established leader, and a rising follower – were also observed over three earlier periods in economic history. These were the deficits borne by the Roman empire vis-à-vis pre-Gupta India circa 1CE; the borrowing by the Abbasid caliphate from Carolingian Frankia in the early ninth century; and the imbalances between West European kingdoms and the Byzantine empire that emerged around the 1300s.
Although data paucity implies that definitive claims on current account deficits are all but impossible, it is possible to rely on indirect sources of evidence to infer the likely presence of imbalances. One such source consists of trade-related documents from the time as well as pottery finds, which ascertain not just the existence but also the size of exchange relationships.
For example, using such records, we demonstrate that Baghdad – the capital of the Abbasid Caliphate – received furs and slaves from the comparative economic backwater that was the Carolingian empire, in exchange for goods such as spices, dates and olive oil. This imbalance may have lasted as long as several centuries.
A second source of evidence comes from numismatic records, especially coin hoards. Hoards of Roman gold aurei and silver dinarii have been discovered, for example, in India, with coinage dating from as early as the reign of Augustus through until at least that of Marcus Aurelius, well over half a century. Rome relied on such specie exports to fund, among other expenditures, continued military adventurism during the second century.
Our final source of evidence relies on fiscal records. Given the close relationship between external and fiscal balances – all else equal, greater government borrowing gives rise to a larger external deficit – chronic budgetary shortfalls generally give rise to rising imbalances.
This was very much the case in Byzantium prior to its decline: around the turn of the previous millennium, the Empire’s saving and reserves were in significant surplus, lending credence to the notion that the flow of products went from East to West. The recipients of such goods? The kingdoms of Western Europe, paid for with silver.