As I always say, don’t conflate trade deals with trade (or the trade deficit)

January 24th, 2017 at 8:51 am

Over at the NYT.

Special for OTE readers, parts that had to be cut for space:

“Since the mid-1970s, the US has regularly imported more than we’ve exported. Net exports (exports-imports) have averaged just under -4 percent of GDP since 2000. Trade deficits are by definition a drag on growth, and that’s especially true in sectors, like manufacturing, that drive the deficit. By linking the trade deficit to manufacturing job loss, Trump made a legitimate argument that resonated with some of his core voters.

There are, of course, many moving parts in the economy, and the trade deficit’s drag on growth has often been offset by other components of GDP. In 2007, the trade deficit was -5 percent of GDP while the unemployment rate was a low 4.6 percent. But the offset in play—the housing bubble—came at a great cost (and was itself, through inflows of cheap capital, related to the trade deficit).”

The idea here is to explain why targeting the economically large and persistent US trade deficit is a reasonable policy goal.

This view is not widely accepted among economists. Everyone gets the by identity, the trade deficit is a drag on growth, but numerous arguments push back on the idea that it’s a problem.

Dean Baker and I tackle the issue here. The punchline, as suggested above, is not that the drag impact of the trade deficit never gets offset. It clearly does, at times. But when offsets are less forthcoming–the Fed’s run out of ammo; the fiscal authorities have gone all austere–the demand-reducing drag from trade imbalances is a problem.

Second, even in flush times, the trade deficit, which is exclusively in manufactured goods, affects the industrial composition of employment, and it is in this regard that Trump has been able to so effectively tap its politics. While high-ranking democrats were running around pushing the next trade deal, he was talking directly to those voters who clearly perceived themselves far more hurt than helped by globalization.

Third, the parenthetical reference above to cheap capital inflows plays a central role in my analysis. Details here and in links therein, but I find that many economists who view the trade deficit as wholly benign fail to deal with these macrodynamics.


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2 comments in reply to "As I always say, don’t conflate trade deals with trade (or the trade deficit)"

  1. Edward Brown says:

    Mr. Bernstein,

    Thank you for the opinion piece in the NY Times today. I have personally been thinking that the Buffett plan, perhaps alone, or perhaps together with a Tobin tax, and some restrictions on capital flows, could help our country.

    Regarding the Buffett plan, in your NY Times piece, you wrote: “Another idea was introduced by Warren Buffett years ago: enforce balanced trade by providing exporters with “import certificates” worth the value of their exports. These could be traded to importing firms here or exporting firms abroad, in a version of cap-and-trade. (However, like Mr. Trump’s ideas for large tariffs, this scheme could generate retaliation — and thus have little impact on the trade deficit — and significant inflation.)”

    Because space is limited in the NY Times, I understand you could not write more (than what is listed in the parentheses above) about why this plan might fail. But I would greatly appreciate reading more of your thoughts on why this plan might not work, and how, exactly, countries might retaliate. Buffett’s original article did a good job of convincing me that retaliation would be unlikely.

    I think the Buffett plan can be a winner politically. If it had been a central element of HRC’s campaign, perhaps it would have reduced the attractiveness of Trump’s message on trade, and who knows, maybe it could have made the difference. It would be good if the Democrats can identify some policies on trade that are political winners AND work economically.

    Regarding the value of the dollar: I think a Tobin tax can reduce speculative cash flows across borders and between asset classes, reduce the size of the financial sector, and make the country more egalitarian, all while raising tax revenue. Combining this with some intelligently designed restrictions on capital flow into or out of the country and I think the dollar will decline to a more appropriate level. (I am not an economist; I am just guessing!) I think these two things combined with the Buffett plan would more or less eliminate our need to worry about designing complex “enforceable rules on things like currency manipulation and rules of origin.”

    Again, I would greatly appreciate the opportunity to read more of your thoughts on the Buffett plan. There is a large group of people who are fascinated with this subject, and both of us are hoping you’ll write more. 🙂 Thank you.