NS3040 Fall Term 2018 Trade and Trade Deficits Europa brazil economy

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.

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?

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

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

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

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