If we want to boost globalization and suppress insularity, we need to understand the mechanics of trade.

April 12th, 2017 at 11:26 am

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.

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6 comments in reply to "If we want to boost globalization and suppress insularity, we need to understand the mechanics of trade."

  1. Serene says:

    There’s no fundamental problem with the idea of globalization that I can see. The problems are with our implementation of this grand idea.

    It needs to be fair. Fairness and capitalism are commonly believed to be diametrically opposed ideas. This is the source of our problems.

    Our world is becoming more politically unstable because of the lack of attention to fairness in the systems we create. Capitalism is great as a foundation, but we’ve struggled for centuries to really contain it into something that seems fair. Our biggest chance to enforce this occurs at our borders.

    Trade treaties have to become about enforcing fairness upon each other. It is the only way.

    • Smith says:

      No, Americans can’t compete and shouldn’t have to compete with low wage countries for jobs. The low wage countries don’t have labor rights, and two systems can’t exist, one free and the other not, this was decided in 1865. Peaceful disengagement and tariffs which created the US economic powerhouse on the first place. Tweaking the existing system won’t work, scrap for the previous mode, practiced today by Germany among others, you don’t move production abroad. It’s not permitted, you don’t close profitable factories to make an extra buck, pocketed by the 1%. No to trade treaties, yes to less trade. When Mexico and China have equivalent labor rights, talk. Anything else fuels middle Americas disgust with coastal Dems, rightfully so.

  2. AngloSaxon says:

    No, you mean, we need to understand the role in capital. Trade is nothing more than the excrement of capital. If foreign capital flows are flying into the US consumer finance markets, you get the kind of “trade patterns” we have seen build since the 1975-79 expansion.

    Globalization is irrelevant for today and not new. It has been going on since the 1700’s.

  3. Smith says:

    This is annoying in the extreme and I’ll restrain myself from expressing the true anger at economists ignoring the obvious.
    a) Companies moved their manufacturing and purchases to overseas markets. This can not happen for example in Germany due to legal constraints, labor rights, labor participation in corporate governance, cultural norms, value of German workforce, size of companies, type of ownership (mid sized private vs. conglomerate behemoth corporate). Where is the liberal’s proposal to end the closing of profitable factories?
    b) We have a huge trade deficit with Mexico, $63 billion, vs 1/6 the size of China’s $364 billion, but Mexico’s GDP is 1/10 the size of China, the population 1/10 the size, and ppp per capita income only 28% greater. Even allowing for $13 billion of the deficit being oil, what’s going on here? Surely if we can’t figure out Mexico, or Japan, or Germany, there is no hope for figuring out China. You don’t really have a clue.
    c) Historically, America became an economic powerhouse with protectionism, tariffs to raise revenue, grow industry and boost employment. Globalization is a race to the bottom. It doesn’t work. We’ve proven that. Trump recognized that. Clinton lost because of it. American workers lost there jobs do it. Saying trust me we just have to tweak it doesn’t cut it.
    d) Currency and trade policy has nothing to do with executives relocating to lower wage countries. We can’t even pay our own workers decent wages and you’re expecting Chinese and Mexican wages to rise to our levels? For them to start buying our products? You can’t get the Germans and Japanese to buy enough of our products and they money. Stop pretending there is a better answer than less trade.
    e) You are perpetuating a corrupt system of global elites living off an export driven economy, especially in China and Mexico. By furnishing them a consumer market, you take away the impetus to develop a domestic market. The rich get richer from U.S. money, and they don’t have to give their own people even substandard wages to fuel growth and get richer.

    This stuff is common sense. I don’t need a PhD in economics, but feel free to point out the fallacy in my logic.

    And tell me what you’re going to do about Mexico, Japan, and Germany first before you tackle China.

    • Smith says:

      Mistakes were made:
      in c), should be “American workers lost their jobs due to it”
      not “American workers lost there jobs do it”
      d) “Currency and trade policy have nothing to do”
      not”Currency and trade policy has nothing to do”
      later in d)…
      “and they have money.”
      not ” and they money.”

    • AngloSaxon says:

      lol, Germany has had the same exact pattern as the US. Intensive capital inflows and production outflows. You need to pay attention. Trade deficits are irrelevant. Sorry, but your piece on Mexico is dead wrong. Trade deficits have nothing to do with “GDP size”, but capital inflows. Mexican capital inflows has been surging since the mid-70’s, you better believe there will be a trade deficit with them.

      Trump “won” because of the evangelical vote directly. His coalition was not vastly different than Bush’s. Look at the raw aggregates and nod. It was very similar with some demographics adding or contracting a bit from those elections.

      Global elitists? Like those in the mid-west that want to tax workers for overseas products?