Reducing trade surpluses need not kill growth -IMF

WASHINGTON, April 14 (Reuters) - Countries can act to reduce huge trading surpluses without stifling economic growth or driving up unemployment, the International Monetary Fund said in a study released on Wednesday.

The findings, based on case studies from Japan, Germany and other countries that successfully reversed large surpluses, may have implications for China, which faces intense pressure to shift policies toward boosting domestic demand.

The research was included in the IMF's regular World Economic Outlook ahead of its upcoming spring meetings. The IMF's full outlook, including economic growth projects, is scheduled for release next week.

The study found that policy-induced reversals in current account surpluses were not typically associated with lower economic growth. Instead, rising domestic demand and investment offset the fall in exports. Employment also tended to rise slightly, helped by growth in the services sectors.

The IMF looked first at 28 instances of big surplus reversals, and then focused on case studies from four countries -- Japan, Germany, Korea and Taiwan.

"Although the circumstances of these case studies were not identical to those prevailing in surplus economies today, the hope is that there are sufficient similarities to facilitate drawing some lessons," the IMF said, without naming China.

The countries examined had many striking similarities with China: export-driven growth; trading imbalances large enough to create tensions with key partners; high savings rates; pegged or heavily managed currencies; and undervalued exchange rates.

All of them allowed their currencies to appreciate substantially against the U.S. dollar, but they did not follow a uniform approach to fiscal and monetary policy. While currency appreciation tended to slow growth, looser monetary or fiscal policy could offset that.

"At the same time, however, it is possible to overestimate how much exchange rate appreciation will likely constrain growth and to react with excessive stimulus to aggregate demand, potentially leading to overheating and asset price booms," the IMF said.

That may be an important caveat for China, where there are already concerns about inflation and overheating asset prices.

Indeed, the United States has been arguing that it is in China's best interest to allow its yuan currency to appreciate more rapidly, in part because of inflation concerns.

Germany and Japan kept policies looser than normal to offset exchange rate appreciation, but had to reverse course and tighten when demand turned out to be stronger than expected. Korea clamped down on monetary and fiscal policy to reduce overheating, while Taiwan stayed neutral.

Across the group, there was no clear trend toward either lower or higher economic output growth after surpluses were reversed, although inflation did not fall in any case study.

There was evidence that the countries "climbed the export quality ladder," shifting toward higher-end exports. China has been doing that as well, trying to move beyond inexpensive T-shirts and toys. (Editing by Leslie Adler)