Though I’m not sure exactly who “we” are, I think we are missing a rare opportunity to better understand the pressures, conflicts, costs, and benefits of international trade. And the stakes are high: continue to get this wrong and the globalization project will face increasing insular pressures.
I yield to no one in my support for expanded global trade, and not just because—although this is a big part of it—robust global supply chains push out the supply curve of goods and services, with positive implications for prices and consumption (along with challenges for environmental and labor conditions/rights). But because emerging economies need a chance to climb the living standards ladder by trading with rich countries. FTR, I recognize that this is not a viable campaign slogan these days.
But nothing happens in a political vacuum. The way globalization has unfolded, in addition to creating winners and losers, has allowed the winners to largely discount and ignore the losers, often under the banner that the losers can’t possibly exist (i.e., their argument seems to be that trade is always win-win, which, for the record, is inconsistent with much trade theory).
Trade deals, like the TPP, have ever less to do with actual trade and more to do with the preferences of the corporate interests with tickets to the negotiating table, who much of the time negotiate protectionism, extending patents and other investor protections. And fellow economists and many top-notch journalists—good men and women with whom I agree on almost everything—tell me trade deficits are always benign, despite common sense, theory, and evidence.
One thing that elevated the trade issue—the Trump campaign and now presidency—is part of the problem. Columnist Eduardo Porter makes a case that I hear a lot lately, one that makes an important, solid point, and then extrapolates to the wrong place. The case is: Trump’s wrong, or late to the party, re China manipulating its currency (really, “depreciating” their currency; in fact, it’s widely agreed they’re still pushing the value of the yuan around, but they’re pushing it up for now). True, and worth promulgating.
But the conclusion then seems to be: since China’s not depreciating, all’s fine there and everywhere else. Dean Baker drills into what’s wrong with that in the Porter piece, but I want to highlight one other point, and then end by telling you about something potentially hopeful in this space.
Porter writes: “The trade deficit [of -5% of GDP in 2007] was because of Americans’ dismal savings rate and supercharged consumption, not a cheap renminbi. After all, if Americans wanted to consume more than they created, they had to get it somewhere.”
That ignores the critical ways in which the global trade accounts must clear (see here and the links therein). We simply don’t choose our savings rate, which means we don’t autonomously choose our trade deficit. Especially with the dollar as the reserve currency, when some countries save large shares of their GDP (China’s almost at 50%; we’re typically below 10%), other countries must save less. Global savings must equal global investment, and this directly maps onto the trade accounts: countries that save more than they invest run trade surpluses, and one way China did that in the 2000s was by suppressing the value of their currency. When that happens, other countries must consume and invest more than they produce, i.e., run trade deficits.
By all means, that’s not always a problem. But in the US case, it has at times led to the loss of manufacturing jobs (which Porter clearly acknowledges) and contributed to persistently weak demand, or secular stagnation, a serious macroeconomic problem. Of course, the drag from trade deficits can be and is often offset with fiscal and monetary policies. But that’s far from always the case, especially when the fiscal authorities, e.g., the Congress, can’t begin to get their act together on this front.
The good news is that intellectual help and clarity is on the way in the form of a forthcoming book by Fred Bergsten and Joe Gagnon, two guys who, like myself, are fans of globalization but keep their eyes wide open re the way things play out in real life. My hope is that their new book, “Currency Conflict and Trade Policy: A New Strategy for the United States,” clears up a lot of the confusion and dismissiveness around the issue.