Tax & Accounting Blog

The World Economy’s Rebalancing Act

Best Practices, Blog, Global Tax Compliance, ONESOURCE April 18, 2016

This is part two in a series on how corporations do business globally. You can read Part 1 here.

It’s hard to argue against balance, and the Great Recession proved the global economy was seriously lacking it.

In the eight years since, there has been positive movement towards the economic rebalancing that nations and people sorely needed.

One key feature of a balanced global economy is relative parity between the import and export volumes of its leading countries. While absolute parity is unrealistic and would in practice be tremendously dangerous, over the long-term the ideal scenario is for the value of imports and exports to grow closer, or at least to avoid drastic and sudden separation. A fast-growing gap between import and export volumes is a signal that an economy is probably on the wrong track.

Fortunately, rebalancing is precisely what’s been happening on a global scale since the economic crisis of 2007-2008. Just look at the import-export volume patterns of the United States and China.

In 2006, for every $100 in trade the U.S. conducted with the rest of the world, $64 were imports and $36 were exports. In China, the ratio was almost the exact opposite: $36 were imports and $64 were exports.

But by 2013, the U.S. was importing only $60 for every $100 in total trade. The gap between imports and exports, while still significant, had experienced a meaningful contraction.

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The same thing happened in China.

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The fact that the gap between imports and exports has narrowed while overall trade has continued to grow significantly is a major signal of rebalancing. A 4% change in the difference between imports and exports in the U.S. might not seem huge, but represents more than $14b worth of goods and services.

Over the long-term, everybody wins when the global economy is balanced, and this data is a sign that good things are to come.

The U.S. economy is manufacturing more cars and producing more domestic energy, which is boosting exports. China is transitioning from an export-driven economy to a consumption-oriented one, which is boosting imports. Domestic companies are driving the rebalancing, and it can only accelerate as those companies operate with greater and greater efficiency.

But this comes against a backdrop in which tax authorities are becoming more diligent in watching those companies. It seems that a new case of high-profile or overly aggressive tax avoidance hits the news cycle every month, and the reality is that people want their leaders to ensure companies pay their fair share.

The primary driver of economic rebalancing is the globalization of business. The truth is that, while this rebalancing is not being driven by any technology or automation platform, it is setting the stage for more of it. Compliance and real-time reporting are more important than ever for the corporate leaders who are trained to look for opportunities everywhere.

Stay tuned for Part three of our series, which will focus on the supply chain. For more information on how global tax departments stay ahead with ONESOURCE corporate tax technology.