NS3040 Fall Term 2019 Trade and Trade Deficits

1. NS3040 Fall Term 2019 Trade and Trade Deficits

2. Five Big Truths About Trade I • Alan Blinder, Five Big Truths About Trade, WSJ, April 22, 2016 • Five issues on which overwhelming majority of economists, conservative and liberal agree. • 1. Most job losses are not due to trade • Every month roughly five million new jobs are created and almost that many are destroyed • International trade accounts for only a very small share of job churn • Vastly more derives from competition and technological change which literally creates and destroys entire industries.

3. Five Big Truths About Trade II • 2. Trade is more about efficiency and hence wages than the number of jobs • Trade is not mainly about creating or destroying jobs • Its about using labor more efficiently – key to higher wages • Catch – whenever trade patterns change some people will gain (either jobs or wages) but others will lose • Federal government should help out more but it doesn’t • If there are losers from trade it is usually because the government has not put in place policies to maximize benefits and minimize costs • 3. Bilateral trade imbalances are inevitable and mostly uninteresting. • I run a trade deficit with PG&E, but a trade surplus with NPS which I sell teaching services but buy little • Should I seek balanced trade with PG&E or NPS?

4. Five Big Truths About Trade III • 4 Running an overall trade deficit does not make us “losers” • U.S. multilateral trade balance – balance with all treading partners has been in deficit for decades • Does that mean our country is in some sort of trouble? • Probably not. • People who claim that our trade deficit kills jobs need to explain how the U.S. managed to achieve 4% unemployment in 2000 when our trade deficit a larger share of GDP than today. • Trade deficit means foreigners send us more goods and services than we send them • To balance they get our IOUs – U.S. Treasury bills, corporate bonds or other private debt instruments

5. Five Big Truths About Trade IV • One exceptional country – the U.S. is the source of the world’s major international currency, the U.S. dollar. • Since ever-expanding world commerce requires ever more dollars, the U.S. must run trade deficits regularly • Sometimes called our “exorbitant privilege” since we get to import more than we export • 5. Trade agreements barely affect a nation’s trade balance • Much of the political angst is directed not at trade in general but specific international trade agreements • TPP will allegedly ship U.S. jobs aboard as well • Some truth here, but jobs will also be created

6. Five Big Truths About Trade V • However “trade” and “trade agreements” are not synonymous • We traded with Mexico long before NAFTA, and that trade was growing • Our trade with China has increased rapidly in recent decades without a succession of trade agreements • Reality, but least understood, a nation’s overall trade balance is determined by its domestic decisions not by trade deals • Borrowing from abroad is the booking counterpart of running a trade deficit • One implies the other

7. Five Big Truths About Trade VI • Amount we borrow must equal the gap between our total spending as a nation (including government spending) and our total income (including the government’s income from taxation) • Spendthrift nations like the U.S. have trade deficits because we don’t save much • These saving decisions are domestic – they do not derive from trade agreements • Summing Up -- America’s trade deficits stem from • Dollar’s international role • American decision not to save much • Not from trade deals