If the U.S. economy is going to recover with the balanced growth that policy makers are touting the trade relationship with the Pacific Rim (meaning China and Japan) has to change and it has to change first with currency revaluation. The trade data released today are a mixed bag that indicate a stabilizing economy but also the same trade patterns now deeply entrenched. The deficit grew most where it is centered -- in the Pacific Rim. Policy seems to be tilted for the most expedient route out of recession and waiting to address the balanced growth issue at a later date.
But the issues can not be treated sequentially, growth requires addressing the trade balance now. During the previous expansion it took some time before growth in spending on capital equipment took hold. It was generally viewed that to meet domestic demand the incentive was for domestic firms to invest overseas in plant and equipment and labor. There is no reason for firms to act differently this time, especially given the excess in global productive capacity. There is also plenty of excess capacity here and prices for labor and capital and structures could fully adjust downward accordingly but the order of the day is to avoid deflation and that is an order worth following.