Ground Floor: If concluded successfully, the Hong Kong session of the World Trade Organisation talks will result in a greater trade volume globally due to reductions in subsidies, tariffs and other trade barriers.

Commercial relations between Western and developing economies will be affected most by any agreement, with significant implications for the trade balances and external positions of the economies involved.

Economists will be quick to criticise any agreement's likely effect on the global external imbalances. Latest data show that the US trade deficit was $373 billion (€310.5 billion) in the first half of 2005, equivalent to over 6 per cent of GDP.

Trade deficits are a persistent feature of the US economy, but the magnitude of the current deficit is unprecedented in modern times and the speed with which it has ballooned is of concern to economists. This is because it has to be financed by borrowing from abroad, which cannot continue indefinitely.

Foreign holdings of US assets rose by $332 billion in the first half of this year, and the US owed a net $2.5 trillion to the rest of the world at the end of 2004. The deficit's origins are numerous. The US labour force is highly educated by world standards, allowing it to specialise in high-skilled manufacturing and services.

This means that much of their goods requirements like clothes, vehicles and electrical consumer goods are met by importing from low-cost economies like China and Mexico. Present trading arrangements inhibit the US from fully marketing its services advantage in developing countries, accentuating the external deficit further.

The US economy consumes large amounts of fuel per unit of GDP and petroleum consumption far exceeds domestic production and oil has to be imported heavily. The hikes in the price of oil since 1999 have caused expenditure on imported fuel to explode.

The US deficit can also be explained in terms of a mismatch between savings and investment in the US economy.

Developments in the housing market are at the core of this situation. Favourable demographics and low real interest rates have supported large increases in US property prices since the mid-1990s. In turn, this has given households confidence about their personal wealth, spurring increased spending and obviating much of the need for saving.

On the investment side, the collapse of the dotcom bubble in 2000 only dampened investment temporarily, with house building quickly filling the gap. Because investment far exceeds saving, the US has to effectively "import" savings funds from abroad to plug the domestic shortfall.

The economic situation in Japan and Germany has facilitated this. Savings are high and investment is low in both economies due to largely pessimistic growth prospects over the past number of years.

Ageing populations have increased savings through pension funds, while the large stock of existing capital makes investment unattractive. The resultant capital funds surplus is dumped on borrower economies like the US.

A striking feature of the past few years has been the enormous acquisition of US debt securities by China and Japan. The unique status of the dollar among world currencies, and the perception of the US as a solvent, business-friendly economy are key factors underlying investors' willingness to pump funds into its economy in such volumes.

Central banks have been crucial buyers of these assets, and this activity has probably been motivated by the liquidity afforded by the dollar on foreign exchange markets and its role as the trade currency for strategically important commodities like oil and gold.

Given the unsustainable nature of this deficit, concern has grown about the possibility of disruptive adjustment. A collapse in US property prices represents one such scenario. This is because house building would decline, and household savings would rise sharply, causing the gap with investment to narrow.

A substantial fall in the dollar's value on foreign exchange markets, however, is the most widely floated route to adjustment. This is because US export prices would fall and import prices would rise, forcing the trade gap to narrow through demand shifts.

Any large dollar depreciation is likely to be accompanied by an interest rate hike in the US, forcing up savings and reducing investment. As US assets are mostly denominated in foreign currencies like euro and sterling, a dollar depreciation would boost the value of external assets.

US liabilities however, are almost exclusively valued in dollars. This means the net asset position of the US economy would improve substantially with depreciation.

More benign adjustment would be achieved by a sustained, substantial rebound of growth in the euro zone and Japan, which would increase US exports. The introduction of more formidable trade barriers on imports from countries like China has been advanced as a solution, but it is unappealing from the perspective of welfare and wider political considerations.

A recent agreement clears the way for textile imports from China to the US to be increased over the coming years and is a harbinger of less protectionist policies.

The effects of events in Hong Kong this week on external imbalances are likely to be slight, as the root causes will not be addressed in serious depth. Agreement is likely to involve increased access by developing nations to Western agricultural markets, but this will be matched by increased exposure to developing markets by Western firms in financial services and IT.

The immediate effects on the US economy will probably be slightly negative, as imports of low value-added products would increase. However, in the longer term, the US would gain a foothold in the services sectors of developing economies and, combined with strong growth in these economies, the US trade position would be likely to improve in the long term.

Shane Garrett is an economist in the Macroeconomics Division of the ESRI.