Evaluation of Trade Imbalances Trade deficits are commonly

Evaluation of Trade Imbalances • Trade deficits are commonly viewed as a sign of economic problems • Trade surpluses are commonly viewed as a sign of economic strength • Both of these views are sometimes true, but not for the reasons generally presumed • Mostly, the general understanding is just wrong

Evaluation of Trade Imbalances • Why is the general understanding wrong? • Trade deficits are not a sign of unfair trade • Trade deficits are not a reflection of job losses • Trade deficits reflect imbalances between domestic saving and investment • Trade deficits do not mean a country is poorer … instead the exact opposite is true.

Trump on China Trade deficit

Trade deficits do not mean trade is unfair • Every international transaction involves mutually voluntary Smith and Jones trade • The Balance of Payments account records all of these transactions • An imbalance on a sub-account like the “Trade” acct. , does not mean the deficit country is losing something and not getting something of equal value in return.

Trade deficits do not imply job losses Figure 3. 1 US Trade Deficits and Unemployment 1980 - 2018 9 7 5 3 -3 -5 -7 -9 % Unemployment Rate CA Balance (hundred billion $) 20 18 20 16 20 14 20 12 20 10 20 08 20 06 20 04 20 02 20 00 19 98 19 96 19 94 19 92 19 90 19 88 19 86 19 84 19 80 -1 19 82 1

Trade deficits do not imply job losses 6 US Trade Balance vs Employment Changes 1980 - 2018 4 2 -2 -4 -6 -8 -10 CA Balance (hundred billions) % Change US Employment 18 20 16 20 14 20 12 20 10 20 08 20 06 20 04 20 02 20 00 20 98 19 96 19 94 19 92 19 90 19 88 19 86 19 84 19 82 19 19 80 0

Trade deficits do not imply job losses • Over the past 40 years, when the US trade deficit has increased, unemployment has decreased and vice versa • when the US trade deficit has increased, employment growth has been positive • Reason 1: US growth inspires consumers to buy more imports • Reason 2: US growth attracts foreign investment or savings • Financial account surplus

Trade deficits are a savings/investment imbalance • This is a reference to the twin-deficit identity • TDI shows that foreign saving is used to finance. . • US government budget deficit • Domestic investment • . . when domestic private saving is insufficient

Trade deficits are a savings/investment imbalance • The TDI relationship offers several suggestions to eliminate a trade deficit • 1) reduce the government budget deficit • US budget deficit in 2019 was 7. 2% of GDP • Raise taxes, lower G spending, reduce transfers (all are unpopular to voters) • Raise private saving (Americans should consume less) • Lower investment

Trade deficits are a savings/investment imbalance • Always easier to blame foreigners • US politicians are disinclined to accept fault • Also disinclined to • Reduce govt. budget deficit (voters dislike) • or to stimulate private savings ( lower consumption) • Or to reduce investment ( lower future growth)

Trade deficits do not mean a country is poorer • Define Domestic Spending (DS) • • • DS = C + I + G (all spending on G&S, including imports) DS can be thought of as “consumption” (except for I) Recall, GNP = C + I + G + CA GNP = DS + CA Recall also that GNP is a measure of production Therefore, value of production = value of consumption + CA

Trade deficits do not mean a country is poorer • Next consider three CA possibilities, first, • If CA = 0 then the country has trade balance • GNP = DS production = consumption

Trade deficits do not mean a country is poorer • Second, • If CA < 0 then the country has a trade deficit • DS > GNP consumption > production

Trade deficits do not mean a country is poorer • Third, • If CA > 0 then the country has a trade surplus • GNP > DS production > consumption

Trade deficits do not mean a country is poorer • Interpretation, • Trade deficits mean a country’s citizens can consume more G&S than they produce in total • Trade deficits mean that the standard of living for a nation is higher (on average) than reflected in its GDP/capita • Trade deficits mean a country is doing better than if it had trade balance (for the same GDP)

Trade deficits do not mean a country is poorer

Trade deficits do not mean a country is poorer • But maybe trade deficits cause lower GDP which could mean the country is worse off. What about all the job losses people claim? • No, this is wrong. Recall the data on trade deficits vs. unemployment and labor growth. That showed that when GDP rises fast, trade deficits rise too. • So, trade deficits are associated with faster growth and higher standards of living. And yet, people complain! 2019 US DS/person is $1500 more than US GDP/person

Trade surpluses do not mean a country is richer • Interpretation, • Trade supluses mean a country’s citizens can consume fewer G&S than they produce in total • Trade surpluses mean that the standard of living for a nation is lower (on average) than reflected in its GDP/capita • Trade surpluses mean a country is doing worse than if it had trade balance (for the same GDP)

Trade surpluses do not mean a country is richer • China’s trade surpluses over the past 25 years means that China has deposited its excess saving in the Ro. W rather than using it for it’s own people. • China is poorer on average than they would be with trade balance. • China’s growth is not lower due to surplus, instead China has grown quickly. the is, more trade is good for all whether a trade surplus or deficit.

US vs China Standard of Living (2018) US China Nominal GDP per cap ($) 62, 592 9, 591 Nominal DS per cap ($) 65, 122 9, 510 Nominal (C + G) per cap ($) 54, 199 5, 209

Reflections • US has about 10 times more consumption/person than China (after eliminating investment) • China may be the world’s factory … US is the world’s consumer • Chinese, (also Africans, S. Asians etc) see the US as hugely more successful economically • And still, the US complains about China’s rise and Increasing economic dominance (a puzzle)

Trade Imbalances can be problematic, for other reasons • The real problem with trade deficits concern the accumulation of debt • If a country runs persistently large trade deficits, it can accumulate unsustainable debts to the Ro. W • This is possibly the US situation in 2020 • Unsustainability could austerity or default

The Trade Deficits are Bad Story Case 1 • Compare DS (cons) with GNP (prod) over two periods • Assume trade balance in both periods • Assume no GNP growth • cons = prod both periods

The Trade Deficits are Bad Story Case 2 • Assume trade deficit in 1 st period (loans) • Assume repay loans w/ interest in 2 nd period • CA surplus in per 2 • Assume no GNP growth • DS higher in 1 • DS lower in 2

The Trade Deficits are Bad Story Case 2 • This is the worrisome outcome • Not bad in per 1 with the deficit; bad in per 2 w/ the surplus because of lower std of living • CA surplus associated with austerity

The Trade Deficits can be OK Story Case 3 • Assume trade deficit in 1 st period (loans) • Assume repay loans w/ interest in 2 nd period • CA surplus in per 2 • Assume GNP growth • DS higher in 1 • No Austerity in per 2

The Trade Deficits can be OK Story Case 3 • If GNP growth were higher then per 2 DS could be higher than 1 • std of living could rise • The key is economic growth • Growth solves borrowing problems

The Trade Surpluses can be OK Story Case 4 • Assume trade surplus in 1 st period (lending) • Assume redeem loans w/ interest in 2 nd period • CA deficit in per 2 • Assume no GNP growth • DS lower in 1 • DS higher in 2

The Trade Surpluses can be Bad Story Case 4 • Suppose the intl loans were made to Greece in 2008 • Greece unable to repay full amount • Greece gets austerity • intl. creditors do not get back what was expected.

Is the US Intl. Debtor Position Worrisome? • Review Intl Debt vs. US National Debt (show US debt clock) • US National (Federal) debt less worrisome when owed to other US residents. • • Debt held by the public – 74% of total Debt held by Social Security Trust and others – 26% • US national debt more of a burden when owed to foreigners • • = ~ 30% of total debt = ~ 40% of debt held by the public

Is the US Intl. Debtor Position Worrisome? • Yes, there will be a $11 trillion (2020 net US IIP) drop in future living standards upon repayment • No, repayment could be done over many years • No, repayment might never occur if there are debt rollovers (i. e. , borrow more to pay off current debt as it comes due) • No, US debt position not so bad as % of its size. • Compare national IIP across countries … next slide

Global IIP Data • Review the Wiki IIP data • Note the largest creditors • Japan, China, Germany ($), HK, Taiwan, Sing, Norway, Switz (%) • Note the US as % of GDP (51%) • Note those with largest debtor positions • US, Spain, UK, Australia ($), • Ireland, Greece, Cyprus, Portugal (%)

Four CA Balance/IIP Situations • 1) Debtor country; CA deficit • has intl debt and is borrowing more 2) Debtor country; CA surplus • has intl debt; paying it off • 3) Creditor country; CA surplus • has loaned money and is loaning more 4) Creditor country; CA deficit • has saved abroad; drawing down savings

CA Balance/IIP Situations Ordered by Best for Near-term Living Std. • 1) Creditor country; CA deficit • 2) Debtor country; CA deficit ? ) Creditor country; CA surplus • ? ) Debtor country; CA surplus

CA Balance/IIP Situations Ordered by Best for Future Living Std. • 1) Creditor country; CA surplus • ? ) Creditor country; CA deficit ? ) Debtor country; CA surplus • 4) Debtor country; CA deficit

Is the US Intl. Debtor Position Worrisome? • No, as long as US GDP growth is fast enough • Fast growth means living stds can continue to grow • • But, US investment is only 17% of GDP (considered low) Also, US real GDP growth in 50 s, 60 s, 70 s, 80 s, 90 s and 00 s up to 2008 was mostly greater than 3% per year But, since 2008, growth was only 2% per year on average Also, Covid crisis means a shrinking economy for some time.

Is the US Intl. Debtor Position Worrisome? • No, because the US dollar is the international reserve • Most US Intl debt is in US dollars … we can print more • Others like Greece, cannot print their way out of an intl debt crisis • • When crises hit, money floods into the US as a safe haven US legal institutions guarantee the safety of US assets US govt has never defaulted on its debt No one fears government turnover and reneging of obligations. • But, current US administration is destroying US reputation because it is unwilling to honor past US obligations (eg. WTO rules, climate change agreement, etc)

Worker Lobby on China Trade