For some reason, international trade is incredibly misunderstood, even by many academics and policy "experts." At the recent G-20 conference in Pittsburgh, "leaders" from 20 economically influential nations discussed ways to plan and run the global economy. One topic that was dicussed was global trade "imbalances." The big focus was on China's net exports and the United States' trade "deficit." Policy experts at the conference noted how U.S. net exports have increased during this recession, and claimed that this was good. For some reason, many people think "exports good, imports bad." This could not be further from the truth; in fact, it is the opposite of reality. Imports, the goods we will consume are benefits and exports, what we send away, are costs. Costs are only necessary to pay for beneficial imports. The fact that we get get more goods from other countries than we send away does not imply that we are in debt, nor does it imply that there is a problem.
Here is an example: I am Mr. Sony from Japan. I sold Joe the Plumber--an American--a Play Station 3 for $300. This would increase America's current account deficit by $300. However, nobody is in debt, at all. Nothing is different than if Mr. Sony was from Oregon and Joe was from Kansas. Why do we not calculate inter-state trade deficits and surpluses? Because it is a silly metric. Borders are a red-herring and trade is trade no matter what borders it crosses.
A common caveat people put into this concept is the one of Chinese currency manipulation. First of all, Chinese currency inflation is bad economic policy, but not because it hurts Americans. It hurts the Chinese people. By inflating the Chinese currency to increase net exports, the Chinese government is lowering the Chinese people's purchasing power and subsidizing American's purchasing power. Americans should be thrilled, we are getting more goods with fewer costs, exports. The Chinese people are forced into making much more than they are able to purchase. This goes back to one of Adam Smith's most basic point about economics. "Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer." This is so intuitive, so why do people make the mistake of valuing exports over imports? In each household we seek to maximize wealth by importing more than we export. It is the same concept between states and between countries.
The most lucid mind that I have found on trade is Don Boudreaux over at Cafe Hayek. Cafe Hayek is a great economics blog,(my personal favorite) and I suggest that everyone check it out, though continue to read My Two Sense!!!
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If this metric is inherently irrational, what purpose does it serve? Also, "inter-state trade deficits" used to be a much bigger issue than they have been for most of the last century. They were a major factor underlying the Civil War. Federalized budgeting and resource reallocation among states and regions have dramatically reduced the perceived disparities, not to mention the calming effect of centralized banking.
ReplyDeleteIt is not irrational; it is just misused. It can serve a purpose, but like many aggregate statistics, much of its helpfulness is lost in the process of aggregation. I think the problem is calling it a trade "deficit." Deficit implies something negative when in fact a trade "deficit" is not inherently bad. Could you elaborate how trade deficits specifically helped cause the Civil War? Even if there is validity in this claim it doesn't affect the legitimacy of my point. It would not be the first time that statesman have gone to war over something irrational. Certainly trade and regulation were causes of the Civil War, but not specifically deficits. And I am surprised that you would claim that centralized banking would be calming or stabilizing. Centralized banking is a prime example of the importance of black swans. Centralized banking has created an illusion of calm, but in reality it just puts off the day of reckoning. Large, interdependent or monopolistic, organizations--like the Fed--are extremely vulnerable to black swans. Instead of getting short, relatively mild monetary panics like in the 19th century, we get large scale recessions and depressions like the Great Depression, today's economic crisis, 70's inflation, etc. This federalization and centralization has made us more vulnerable to economic catastrophe, not less. Explain this claim further:"Federalized budgeting and resource reallocation among states and regions have dramatically reduced the perceived disparities."
ReplyDeleteWhat I said was that federalized economic control reduced the "perceived" disparities in regional resources and implied that central banking had a similar "calming effect." Economics (unlike chemistry or physics) is inherently heuristic. The behaviors that, in sum, characterize "economic activity" are completely dependent on the perceptions, assumptions, etc. of the participants. To the extent that a sufficiently large number of economic actors believe a particular state of affairs is "real" (or "true" or whatever-pick your adjective), then that becomes "reality." In the U.S., the rise of the Fed (and earlier, the Dept. of Commerce) along with massive resource reallocation (highway system, dams and water projects, agricultural price supports, defense contracts)
ReplyDeletehelped smooth out the perception of inter-regional disparities and unify an increasingly heterogenous society that (sufficiently) bought into the "can-do" spirit. In effect, what I am suggesting is that putting off "the day of reckoning" has been the cornerstone of economic policy from the New Deal onward. Of course, this whole state of affairs was helped tremendously by the fortuitous self-crippling of what could have been the two most formidable political/economic competitors for most of that era-Russia and China. It's not coincidental that the current mess has flowered not long after the re-emergence of both of them into the world economic system. And I agree with you that the U.S. belief in central banking (and its exporting of the idea to Europe) makes it particularly vulnerable when either China (and to a lesser extent, Russia) flexes its economic and/or political muscles.
P. S. I wasn't questioning the legitimacy of your point about inter-state trade deficits. I was actually agreeing with you by pointing out that this kind of "metric" is actually a political tool masquerading as "economics." Just as trade deficits were used (in part) to justify succession leading to the Civil War, international trade deficits are used as political tools in modern times. It can also work the other way, where essentially economic issues are treated as political issues (e.g. Israeli-Syrian "political" dispute is really a cover for a long-running dispute over control of water resources).
ReplyDeleteI think you view the relationship between international powers incorrectly. There is no evidence whatsoever that the current economic mess is caused by international trade between the U.S. and either China or Russia. I don't know what you mean when you say China or Russia flex there economic muscles, By trading with us? In a society where trade is voluntary; trade will be beneficial to both powers no matter how rich or poor the partners are. Economics is not a zero sum game. Maybe we should be concerned by their growing political and militaristic strength, but not by their economies improving. Just as New Yorkers or Sayvillians should not be worried if Clevelanders become wealthier, Americans should not be worried if Chinese are richer. Muscles are not that important in voluntary exchange. Borders are red herrings in economics.
ReplyDelete"Voluntary" suggests that there is a choice whether to trade or not. No responsible observer of the current geo-political scene would suggest that international trade is "voluntary." Aren't "the Chinese" now one of the largest holders of both U. S. Government debt and private CMBS? What happens when they decide they need to get paid (as happened last year)? Doesn't dramatically increased Chinese demand for oil drive up oil prices worldwide? Doesn't Russian control of vast natural gas reserves and transmission facilities impact the European economy and by extension the world economy? (Not that there's anything "wrong" with any of these three events occurring). I thought you and I agreed that so-called trade imbalances in goods were really just political tools. The real "economic" action at the international level is in debt instruments. Let's just pray that neither the Chinese nor the Russian ruling elite decides that all this capitalism is a waste of time. Then we could have a real hot mess on our hands!
ReplyDeleteYou are right, when I was talking about trade I was talking about Americans buying Chinese tires and Chinese people buying American chickens--which happens a lot. My main point was about how this kind of trade is beneficial to both parties even if one party is richer than the other. I would say that this is "real economic action." This form of voluntary trade is meaningful and beneficial. Why are Chinese and Russian producers buying oil not voluntary? This is not even a problem at all. This is just a market activity and there is no problem.
ReplyDeleteBut yes, our government debt is a huge problem. These imbalances are incredibly meaningful, and although I generally disregard financial predictions but there is some activity going on that makes hyperinflation seem possible. The purchase of our debt is a political move and we need to reduce our political debt or the consequences could be devastating. This is not a problem with foreign trade of goods and services, but of our government's reckless spending. The Chinese are not going to decide any time soon that capitalism is not working. They want to stay in power and managed privitization of industry is the best technique for this. There system of capitalism is not perfect and is (was) inferior to the American system.
These articles reiterate your main point I think, however.
http://www.independent.co.uk/news/business/news/the-demise-of-the-dollar-1798175.html
ReplyDeletehttp://www.lewrockwell.com/spl/stock-market-collapse-ahead.html
http://www.lewrockwell.com/orig10/marshall2.1.1.html