9 Understanding Imbalances in a Globalised International Economic

his chapter provides an alternative approach to the traditional analysis of the problem of international imbalances and their implication for global financial stability. While the problem of imbal-ances is usually simplified by looking at bilateral imbalance between two countries, in the current case the US and China, or more broadly Asia, a global approach is more relevant to an understanding of the possible persistence of any individual bilateral imbalances. Second, following traditional trade theory, there is a tendency to emphasise trade in domestically produced final goods between nations who specialise according to their respective comparative advantages. Actual international trade flows, however, tend to be dominated by intra-industry trade, and semi-finished intermediate goods rather than final goods, and these two trade flows have become the fastest source of trade growth. Integrated global production chains break the identity between countries, firms and trade flows, making analysis of imbalances more complicated. This emphasis on domestically produced final goods has meant that financial flows are primarily considered as compensating flows required to offset trade deficits, rather than being the result of global investment and production decisions that determine the global pattern of trade in intermediate and final goods. Thus, the sustainability of the current imbalances is discussed in terms of the willingness of foreign lenders to continue to finance the US deficit, rather than in terms of whethe