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Wars of Trade

The Trump administration recently made moves on trade, including the steel tariffs across many countries worldwide and the particular tariffs aimed at China. There’s been a lot of discussion regarding these moves by the Trump administration on whether or not we will see global trade wars. Some of my regular readers may recall my old posts on how monetary expansion is basically a way for countries to start currency wars. In a sense, currency wars are trade wars. Using this line of reasoning, the Trump administration is not the one starting the trade war. Anyway, it’s important to note that out of the entire US economy, ~13% of US GDP is from exports. This makes the US one of the least reliant economies in terms of its need for external demand to sustain domestic demand. Also note that ~45-50% of that 13% of GDP in exports is within NAFTA. As long as NAFTA is held together, the impact of large-scale trade wars on the US economy is minimal.

If we account for all non-NAFTA exports, we reach a number that yields a total of ~6-7% of GDP. Note that much of that 6-7% is also in the non-NAFTA energy market (the largest net exporters of oil/energy to the US are Canada and Mexico). That means only ~5% of the US economy is actually exposed to large, rapid shifts in external demand if we exclude energy and if we go outside of the North American continent.

What does all that mean? Firstly, it means NAFTA is so central and layered into the American economy that any large disturbance or removal of NAFTA could yield a major depression and create serious problems for Canada, the US, and Mexico. If such a scenario did occur, Canada would likely still have preferential access to US markets and would probably be mostly fine. Mexico, especially the parts of Mexico that’ve industrialized and seen the most foreign investment (mostly parts closer to the US), would get hammered. Canada won’t be impacted much and could slightly gain (or lose) depending on how the NAFTA repeal played out.

Not only would Mexico be devastated, but the entire situation would likely cause fragmentation and a depression across large parts of the country as supply-chains fracture. The resulting impact would be very hard on US states near the Southern border–both economically and socio-politically. As a result, illegal immigration into the US from Mexico would likely increase as the rising Mexican living standards we’ve witnessed in the last ~15-20 years would suddenly fall apart, giving migrants more of an incentive to come to the US. Drug cartels would likely gain more sway in Mexico, especially in areas further away from Mexico City (like near the US border).

NAFTA is so integrated into the economies of US and Mexico that discarding it would create real problems for both countries involved. Not only that, but it’d create a scenario where pretty much everyone in North America would be a loser. Hence, I’m highly skeptical of the Trump administration scrapping NAFTA.

The largest surplus countries/regions in the world are the Eurozone (concentrated in Northern Europe), Japan, China, Japan, and Asian Newly Industrialized Economies (NIEs; countries like Korea, Taiwan, Singapore among others). The main countries running current account surpluses are from Central or Northern Europe and the Far East.

Starting a trade war necessarily means that overall trade between the countries in question drops. So how can the US benefit much in a trade war if the overall trade between countries drops? The only way is by capturing a larger share of the trade balance.

Considering that the US doesn’t export much to the rest of the world (especially if NAFTA is stripped out) and considering that the US has been far less protectionist than most of its competitors globally, a protectionist turn towards non-NAFTA members would lead to a significant rise in the US share of global exports. This would be very bad for most of the economies in the rest of the world, especially economies heavily reliant on exports to sustain their economic models.

Of course, the countries that won’t be hurt very much are countries that don’t rely on running current account surpluses to drive growth. What are these countries? For the most part, they’re Anglo countries like the UK. You can add India, and probably Mexico (although in NAFTA), to that list of countries.

In the situation NAFTA gets smashed, everyone in NAFTA loses (except maybe Canada, but even that is dubious). The best deterrence for Mexico and Central/South American migrants is if their countries are prosperous. Any policy shift that damages Mexico and Central/South American country economies will create serious problems for the US and such a shift would not be positive. The ramifications and 2nd and 3rd order consequences of such a policy benefit no one. That said, I fully expect NAFTA will not be discarded.

In the case NAFTA remains and gets renegotiated, we will likely see the US trade balance improve and we will see the NAFTA countries current account balance improve relative to the non-NAFTA part. In this case, a trade war with pretty much any non-NAFTA country would lead to a benefit for the US. The primary countries that are threatened would be large surplus countries like Japan, China, Germany, Korea, much of Southeast Asia, much of Northern Europe, and some additional countries. Those countries’ economies would be hammered in a global trade war where the US goes protectionist.

The countries least affected by a US lashing out at other countries’ protectionist policies would be countries with relatively liberal financial systems that run current account deficits, like the UK and probably Mexico and India.

Guest Author

Suvy Boyina is an equity and options trader, mathematician, writer, blogger, and entrepreneur.

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40 thoughts on “Wars of Trade

  1. I’m not completely sure that the Untied States will “win” these trade-wars. We might “win” them in the narrow sense but I think Donald Trump is doing long-term damage to the reputation of the United States. I don’t know if world leaders always like Bush II and they certainly disliked his adventurism in Iraq but he was solid and steady on free trade and not into purposeful antagonism.

    World leaders are already learning to treat Trump like a kelpocratic dictator or being advise to in the press:


    The best case scenario for me is that Democrats regain control of one or both houses of Congress in 2018 and then Trump loses reelection in 2020. But how long will the world remember that we elected Trump and be suspicious that we go from reasonable politician to unpredictable demagogue?


      • The United States is still a really big country and market. People will want to sell their products here. That will give us a lot of grace. Our best universities are top-notch and Chinese is far from becoming a lingua franca. The less than democratic aspects of China probably make the world iffy to use the yuan as a reserve currency.


    • We might “win” them in the narrow sense

      We can’t even do that, because they’re being done in a flatly stupid fashion.

      Tariff’s on steel? We don’t make much steel and we’re not going to make much steel, but we export a lot of finished goods made of steel. Congrats, we just hiked the prices of everyone producing goods with steel in them, which means they’re now priced too highly overseas to sell.

      Domestically, they all cost more, and our exports suffer — and our native steel industry is small, employees few people, and won’t employee nearly as many as we’re losing even if it expanded rapidly. (Latest estimate showed that we’re looking at losing 16 jobs for every one this tariff ‘protects’).

      Then there’s the retailitory tariffs, which arent’ being implemented by idiots whose idea of global trade is “Crap I remember about mercantilism from junior high, and also I really liked the 1950s and steel was big, right?”.

      They’re narrowly targetted to prevent as much “self-harm” as possible, and aimed to hurt very specific areas of America (specifically, conservative areas that support Trump).

      If this was dodgeball, it starts with Trump hitting one of his own teammates and the ball ricocheting into his own face.


  2. You seem to be arguing that the Trump admin won’t enter a trade war with Mexico because to do so would be stupid and counterproductive.

    “What’s the most stupid and counterproductive available option?” has been a pretty decent predictor of the Trump admin’s actions so far.


    • I’m not saying the Trump administration won’t do something stupid. I’m saying I don’t expect them to and if they try it, I suspect there will be more pushback from Congress than many suspect. NAFTA is so entangled in our economy that if the Trump administration tried to discard it overnight, I bet it would get logged up in the courts for years. So I don’t exactly see the same scenarios as others.

      If you’ve been doing things a certain way for decades, it’s nearly impossible to disentangle everything overnight. Much of our energy trade with Mexico (including pipelines and natural gas exports) is heavily intertwined with NAFTA.


      • I agree, and in addition note that Trump is all about theater and teeth-baring, chest pounding, poo flinging displays of aggression for his base, not actual measurable policy shifts.

        So some minor tweaking of NAFTA, preferably with executive orders will be more likely than anything that would upset the donors.


      • The hidden complexity of systems of systems is something even well-meaning people have trouble with (for instance, the early 2000s California electricity fiasco), and the Trump administration is almost never well meaning.

        The Trump administration will play NAFTA and WTO Jenga, will *enjoy* playing it, and, more likely than not, embrace the result. (see for example, Mr. or Ms. CS below)


  3. Quite correct in every way, Suvy.
    More capitulation to notion of image and reputation is just moronic branding concerns.

    The American taxpayer has paid dearly in creating, protecting and providing the system that exists, protecting global commerce with the US Navy, allowing our USD to be used for trade, our financial system to serve as a risk mitigation function for all of the global current account surplus structurer’s (causing income inequality to rise in US, businesses to be shuttered, wages to stagnate, government tax take to dwindle, and so forth).

    Better we move forward then to aid and abet these distortions, to tackle the problem head-
    on, than to make excuses, to support the interests of our people, and strengthen, so as to be able to positively influence the world in the future. What most people do not realize is that American elites have allowed the US to have been used in the way many imagine Imperial powers to use colonies. We have allowed the global market to colonize our consumer markets, financial system and social structure has suffered enough. If East Asian NIE’s are a harbinger, certainly, once a demand taker from other markets, always a demand taker. It is one thing to protect and nurture industries (infant industry theory), quite another to what to do it decade after decade.

    Finally, your perspective .on NAFTA, spot on. Trump should have focused on EU and East Asia.

    Great stuff. I know you are a Complex Adaptive Systems guy, rather than an ideologue, keep it up, we have had enough excuses and co-dependency premises of Globalization motifs in the post-Internet world. There are serious problems of the commons abuses, enough is enough. Let the world wake up to the real deal, and get a reset on their shallow beliefs.


    • The mere existence of a trade deficit (i.e. the fact that you import more than you export) doesn’t seem like a problem in need of a solution. Who is made worse off by the fact that Americans buy more goods from money that they print than they sell (for money that other countries print)?


      • Printing money, a term given to you by Finance, is M2 growth. Check the charts, I suggest Trading Economics, then come back to me and tell me who is printing money. Then, you will return, and note size of economy, opportunity and population size. Then I will respond, let us consider wage shar of income in the economy. Then you will note something about per capita stock of FAI, and I will note the pace of accumulation of debt on the system, and we will be finished.

        But maybe, you won’t mention these things, and still won’t understand the underlying elements within the system and the structural inter-relations, and will attempt to further extend an open-ended bland assertion from the superficial belief and value-laden world of post-Modern, Social Marxian, Critical Theoretical.delusions, which is repeated, because you believed others to have made the assertion previously, were valid in doing so.


        • I’m pretty sure you’re new here, so I’m assuming not knowing our expectations rather than deliberate flouting of them, but please refrain from claiming other people’s arguments, assertions, etc. are “delusional”. Loaded language like that is generally not welcome, as it has a negative impact on commenting civility.


          • The notion that the US prints money to buy others goods is incorrect.
            Money Printing is not a notion of Economics, it is a notion of Finance.
            Merely check M2, note pace of growth, then find, who is money printing.

            If one to find out utility of Money printing, then create a back of the envelope algorithm including the issues you deem important, related, impacted
            (M2, GDP growth, Employment Levels, Debt Accumulation, Deposits in banking system, NPL’s in banking system, etc…)

            It, itself, the notion, and its expression, to me, is as you imagine of delusion for the other. But, it has been repeated enough, that it has taken on a life of its own, and the purveyors, of the notion, have been those whose ideological underpinnings, find root in post-Modern thought, Marxism, any number of Critical Theoretical disciplines (Libertarianism) and are used to imply an unfair activity; mis-use of power, or to talk down in some other manner. When in fact, what is occurring, is directly the opposite. Money printing is a serious problem, and is being done by all of the Surplus Structuring interventionists in the present era (but Germany, which did it previously).


            • Money Printing is not a notion of Economics, it is a notion of Finance.

              ‘Money Printing’ is not a ‘notion’ of anyone. It is an actual physical thing that occurs in the real world. Literal money is literally printed.

              And while I cannot speak for everyone, I have absolutely no idea what you are trying to say _at all_.

              I mean, take this paragraph:

              If one to find out utility of Money printing, then create a back of the envelope algorithm including the issues you deem important, related, impacted
              (M2, GDP growth, Employment Levels, Debt Accumulation, Deposits in banking system, NPL’s in banking system, etc…)

              I presume there is a ‘wants’ missing from the start of that, but even then there is no actual _conclusion_ to that sentence. If we want to find the utility of money printing, we should create an algorithm about things we think are ‘important’ and ‘related’…and?

              Do you have some opinions about what such an algorithm would look like, how things should be weighted, or what we’re _normally_ missing when we do that, or what sort of _conclusions_ you are expecting us to reach?

              Or do you simply think that no one has ever said ‘Hey, I wonder if printing more money has some pros and cons and if it affects anything else?’

              …except you can’t be saying that, because, as far as I can tell, you seem pretty sure everyone has some theory about printing money, and everyone’s theory is wrong.

              I can’t even figure out if you’re for money printing or against it(1). You call printing money a serious problem, and at the same time complain how all sorts of ideologies critize printing money. Are they critizing it for the wrong reason? Are we supposed to find the actual reason with our algorithm?

              And, incidentally, it’s pretty easy to find Marxists who have no problem with printing excessive money, thus deliberately causing inflation. Because that makes people with savings have less savings, and people with debts have less debts. It pulls everyone towards zero, aka, reduces inequality. I’m not saying this is a good tradoff on the whole, or would even work (It actually wouldn’t, because wages are like a thousand times sticker than prices, and debts would just start having inflation built in.), but generalizing that Marxists have a problem with ‘printing money’ is wrong.

              1) Neither position, I should add, is a particularly good one. The question is ‘how much’ money should be printed, not ‘should money be printed at all’. Failing to print any new money at all would result in the economy being capped, and, eventually, shrinking, as money disappears from the economy (and sometimes basically from existence) all the time.


              • No, “money printing” as you hear it discussed is a notion of Finance, as I said, it has to do with blowing up asset values and printing savings, via debt-taking, which become savings, as loans are deposited guess where, in the deposit system. It is M2.

                When you are thinking of actually printing greenbacks r Euro, then you are talking money in circulation, M1.

                Fractional Reserve banking system…..want a loan
                Bank looks interest rates, collateral, RRR, cash flow, if can manage cash flow reuirements, and you are a god risk, if collateral seems in order, create a loan out of thin air, loan out of thin air, deposited in banking deposit system, sees “savings” rise, the more money you print, more savings, more asset rises, in a speculative to ponzi financial system.

                Easy enough, so money printing as talked about in FT, on Bloomberg, or in the Economist is the function I have described above, and can be checked by checking M2, as stated.


            • You can, in general, say whatever you want about money printing and the idea of the US printing money. I can’t say I find your comment directly above this one particularly clear, but as far as I can parse it, there’s nothing in it I object to from a moderating standpoint. (Other, perhaps, than your apparent unwillingness to accept that a moderator telling you something as a moderator is giving you a warning, not making an argument to be refuted. But, again, you appear to be new, so no big deal at the moment.)

              Excluded from this general “say whatever you want”, however, is using loaded, hostile language, for example language that implies mental illness, when directly addressing other commenters, as you did in the comment I objected to.

              It’s a fairly straightforward distinction of tone and one that I expect people to be able to make here.


        • Dude, practically all or most countries* are operating on a fiat currency system. Either a trade deficit takes some amount of money permanently out of circulation or it doesn’t. If it does, its not clear why this is a problem. Sure, there is some deflationary pressure**, but the Fed can compensate for this. If there is no decrease to the money supply then I’m not sure what the complaint is.

          I will ignore the insults about me being some kind of critical theorist. I’m an analytic philosopher for god’s sake. I don’t think there could be a more inaccurate insult.

          *Countries in the eurozone are a weird case. While the eurozone as a whole is a fiat currency system, each country within the zone is limited in terms of managing the money supply. They are as close (in effect) as we get to an actual gold standard nowadays.


          **I’m not entirely convinced that deflationary pressure especially when the economy is doing well is a bad thing. Sure, deflation depresses consumption and increases savings (i.e. investment), but I don’t think that’s always a bad thing. And its not like the US is in a liquidity trap right now.


          • A structured current account deficit, or countries as South Korea and Taiwan, trying to stay under Treasury 3% caps to avoid being labeled a manipulator, by using Insurance companies and pension systems to invest in corporate bonds and equities, is a way to weaken their currency, drive up value of dollar, place undue stress on American industry, depress US wages, cause imports to rise and aren’t taken out of the system they are serviced by interest income on debt or dividends and asset valuation rises, involving themselves in the calculus of Fed interest rate rises, and the acceleration of this process depresses action on this matter, cycling asset values higher and further distorting our financial system and economy. Plain and simple. Liquidity Trap, see Adair Turner, between Debt and the Devil, we need not worry, might merely need to do Direct Monetary Finance, and essentially, this is what the surplus structurer’s have been doing themselves, and continuously, but to industry, rather than consumers.

            Why continue to support free trade, consumers over producers, the premise underlying all variants of Ricardo that have evolved since Ricardo*, when everyone in East Asia and Northern Europe is supporting producers?
            (Because our support for Free Trade during the Cold War?)

            * that is the Free Trade theories, rather than the Industrial Policy trade theories, which is what is being practiced elsewhere


      • The current account deficit has a corollary, a capital account surplus.
        The current account deficit or current account surplus is often used interchangeably with a trade deficit or surplus. The issue of a current account deficit is that money need flow in to balance the deficit. GDP consists of Consumption and Savings; what you do not consume you save (inventories, etc).

        From the savings component of GDP we get Investment, net exports and a surplus or deficit. A Current account deficit or surplus that requires someone else in the globe to run the corresponding capital account surplus or deficit.

        If you are an interventionist surplus structurer than you are constantly blowing up assets to print savings so that you can export these “savings” to the world.

        The impact of surplus structurer’s sending their “savings” on the back of money printing is to enter the dollar market with demand for dollar assets. This pushes up the dollar value, this makes US companies operating domestically less competitive, this shutters viable going concerns, this leads to wage suppression and flows excess capital into the US market, depressing interest rates and pushing up asset values as too much savings is chasing too few assets. The US has more than enough capital to fund any internal investment it needs (even if Investment banks love the process so that can manage global high net worth assets and underwrite ponzi-like off-shore Chinese corporate’s who get to list on Nasdaq of Shells with no assets in HK, of income streams supposedly coming from the Mainland).

        So, the structuring of surpluses and access to the US Financial Markets, post 1998, increasingly distorts asset values in US (as it did in lead up to 2008), continually pressures wages in US, increases income and wealth inequality, and places undue pressure on American industry do to the varying paces of Money Printing across the globe that can be validated in the US Financial system, using the US as a risk mitigation function for their excess bloat, while enabling them to gain US assets.

        This not only is a problem for the US, in the case of debt accumulation see the Chinese efficiency of debt lowering from a 1 to 1 ratio (1 RMB of loan, 1 RMB of gdp growth) to a 6-8 to 1 ratio at present (dependent upon the level of Total Social Financing, in any given period). So, problem, more lending on ever -inflating asset prices, printing more savings into the deposit system, causing savings to rise, which push asset prices higher and cycle more lending, while all of this is becoming more inefficient, so see the spread between growth in GDP and debt taking widening, as debt is moving more vertical.

        Easy enough to see the great dysfunction. And we allow everyone to do this to us, for what, image and reputation. Who me, no, no problem, I am yesterdays starlet, you can have the limelight, I have the strengthening of my nations social fabric. Thanks, no, it’s all you, and the rest of you, if they move to a deficit stance over the next 30-40 years, then you can use their currency to trade. But now, we have had enough of carrying the system, to the detriment of our people.


    • Actually, that notion is a premise of the theory of Globalization.

      Actually, review of Economic History, rather than popular theories, that too often take on a life of their own, for those outside the field of study, who understand the limits of the theory, more generally, but, review of Economic History will show, that current account trade deficit countries ALWAYS WIN trade wars.

      But the premise in Globalization revolves around the benefits of certain stance in regards to producers and consumers. So certain policies good for producers, some for consumers.

      Insofar as consumption as a portion of global GDP has continued to lessen since 2008 (and since the late 1990’s, at least, since financial globalization), as economies seeing higher growth continue to use non-market interventionist policies, continue to suppress wage shares and consumption in their economies, pushing up savings componennt of GDP and investment, thus high growth rates, I am not sure why you would use a notion of laissez faire economics, of trade theory, and free markets premising workers and consumption, when the non-laissez faire interventionism is undermining consumption globally.

      Trade is good for everyone (workers as opposed to producers, the dichotomy upon which the theory exists).
      Interventionism is bad, and preferences producers over consumers.

      Interventionism occuring as consumption to GDP decreases globally

      But, somehow trade wars hurt .

      Not, and not true, an ideological tenant of Finance and Laissez Faire economics, not practiced by any of the interventionists structuring surpluses.

      Actually, History shows, rather than ideology supposes that Current Account Deficit countries always win, by capturing more of the own demand. To believe otherwise is to believe in a flat earth.

      Said on News TV, but they are not talking Economics.
      They are talking Finance.
      Asset Prices, the Dow Moved, Oil went higher today, great time to buy (the bulls bullshit)


      • This is NOT a moderator comment but just informational/my personal perspective:

        James-K is an economist and lives in a non-American time zone.

        So a paragraph like this one:

        “Actually, review of Economic History, rather than popular theories, that too often take on a life of their own, for those outside the field of study, who understand the limits of the theory, more generally, but, review of Economic History will show, that current account trade deficit countries ALWAYS WIN trade wars.”

        may not be aiming at the right target in its comma-framed clauses.


        • Then, if one has reviewed Economic History, which has not be used to teach Economics for several decades, subject will know that this is the case as stated. Dependent upon level of study, will know the purpose and extent of theory, the utility and limitations.

          Theory is a tool for sight, a framing device, not what exists. Theory, is a potential way to review the world we find around ourselves. Repeat theoretical assumptions, premises, and expectations enough and it may seem as if existent, but doesn’t make it so, especially when these are undermined by what we observe, even without careful review, of what is occurring around us, as it should be clear that experience is standing counter to what assumptions, premises and expectations suppose.


      • Your post is premised on the long-discredited fallacies of mercantilism. Running a current account surplus is nothing to desire – it simply means you are trading goods for money at a greater rate than you are trading money for goods. The whole point of money is to exchange it for goods, so why would you want to give away a bunch of your goods only to hoard the currency you receive in return?

        Trade is beneficial because it promotes specialisation – by focusing its production on fewer industries a nation may become more productive in each. This is the exact logic that underpins all trade and exchange, attempting to capture your nation’s own demand, as you put it, is like complaining about your own current account deficit with your local supermarket and deciding to become a subsistence farmer.


        • The tone of my response might sound as if I support mercantilism, because I am noting the functions that are in play, in the system, as it is working, as it is evolving and as it extends. Those things that I had mentioned, are not discredited, they are occurring. Insofar as we are committed to open and free markets they need to be discredited, and they are operating, so free markets are only a pretension. Indeed I would think few could actually argue that the national economies of the world, are anything more, than more open, than in the past, mixed economies.

          The dichotomy around which all trade theory revolves is “producer” versus “consumer”. Even the notion of specialization, itself, will find its roots of support in this dichotomization. Industrial trade policies, Infant Industry Theories, New Industrial Trade Policy (Producer) vs more Ricardian, gains from trade theories. Underlying these is consumer vs producer. Whether you are trying to support a middle class or build the next Hyundai (which makes everything from ships to potato chips). No specialization happening there. Heck they are still hand wrapping their Asian pears and selling for a bundle.

          Promoting specialization, is a Ricardian premise. Yes, free trade theory, yes, consumers benefit of the impact of specialization, insofar as such is operating across the market (the one we are discussing is the global market), yet in the market that we currently have there is a scarce an imagination to specialization at all.

          And, what is occurring, is occurring, as stated.

          If the world isn’t operating on Free Trade theory, then operating on it yourself, by opening your markets, by opening your financial system (trade theory says absolutely nothing, nor does economics itself, about debt, and assets, model economic system, consumer spends all their disposable (after tax) income, and business invests from current income).

          I am not saying become mercantilistic; attaching more of your own demand is not mercantilistic (mercantilism is structuring your system to gather others treasure).

          Hoarding money? Pushing up others currency, pushing down your own currency, using external demand, creates employment for people, creates tax revenues for government, creates income for the financial system, cash flow, and creates profits for business, enables perceptions of growth and success, positively influences investor sentiment, there are quite a few reasons, beyond notions of specialization in exchange relationships of value for value.

          Ricardian Trade theories are merely tools, or frames for viewing the world we find around us, for grounding discussions, but people, companies and nations live in a breathing and moving world, filled with needs, wants and demands, beyond the mere provision of a physical object or experience of an intangible service. There are real and important considerations, that live outside the vacuums in which stylized and idealized economic theories live.

          Running a current account deficit is nothing to…..
          Except, how do other countries get your currency to trade with other countries for the things they desire (trade cover), which is now morphing into, trade cover, and cross-border loan payment cover, and high net worth capital flight cover, from its beginning of 3 months trade cover desired, to god knows what, the world will imagine the US need to provide them, all of this coverage, of course, requires the US to take on more debt. To run deficits, how else would they get the USD to cover their needs.

          But, debt, isn’t formally included in econometric modeling, is it? Let alone theories of trade.

          Capture own demand (in the case of US, rather than a new developer)

          Serves to strengthen and reinforce a diverse array of advanced material capabilities and serves many desirable, even necessary, social functions from the individual level to the global.


          • Hoarding money? Pushing up others currency, pushing down your own currency, using external demand, creates employment for people, creates tax revenues for government, creates income for the financial system, cash flow, and creates profits for business, enables perceptions of growth and success, positively influences investor sentiment, there are quite a few reasons, beyond notions of specialization in exchange relationships of value for value.

            No, it really doesn’t. Governments are perfectly capable of controlling their money supply via interest rates, there is no incremental benefit from trying to do it using trade policy – that’s like trying to cure your cold by cutting off your head.

            Except, how do other countries get your currency to trade with other countries for the things they desire (trade cover), which is now morphing into, trade cover, and cross-border loan payment cover, and high net worth capital flight cover, from its beginning of 3 months trade cover desired, to god knows what, the world will imagine the US need to provide them, all of this coverage, of course, requires the US to take on more debt. To run deficits, how else would they get the USD to cover their needs.

            You are confusing the government and the nation, also cause and effect. You seem to be postulating a model whereby the US government is forced to run a Budget deficit because of the current account deficit, but this reverses the causality – the US government running a Budget deficit (and financing it through overseas borrowing) appreciates the US dollar, thereby making imports more attractive relative to domestic production. I’m all in favour of the US getting its Budget deficit under control, but you can’t do that by fooling about with trade policy.

            As for private sector borrowing, all that matters is that the money being borrowed is being invested well. If it is, it doesn’t matter where the money is coming from. If it isn’t then that’s a problem but no more of a problem that if the malinvestment were being funded domestically.

            But, debt, isn’t formally included in econometric modeling, is it? Let alone theories of trade.

            Econometrics is a method, not a subject – some models have debt in them, some don’t, depend on what they are modelling. As for trade theory, the Heckscher-Ohlin trade model doesn’t talk about finance much because it is robust to finance, I’ve studied international finance at a postgraduate level, and there’s nothing in there that undermines contemporary economic trade models, or their policy recommendations.


            • If H-O is correct, then it is understandable that they have posited corporate offshoring as a labor arbitrage. Further, that they have supported with companies need be competitive and that many have understood it to be correct that companies have done so. But, Chinese export capital intensive goods and US agricultural.

              So, the assumptions are reversed, in experience of occurrences.

              Further, the model would be labor intensive, rather than capital intensive.

              Being perfectly capable of doing something, and doing it are two separate things. Then, I guess this undermines the notion of the Law of One price and its implications. In this case we confuse what a government can do, or a nation, and then what need be done in terms of premising a global market. Because differences in policy, in levels of intervention would then undermine the assumptions that necessitate openness.

              You keep talking about Trade, rather than all that which goes into the Current Account Deficit. Germany instituted labor reforms in 2004 which pushed down consumption as a share of GDP, without pushing up investment, and run a tight fiscal stance, are you telling me this is pushing German surpluses out in the Southern periphery and globally.

              A country can push down consumption, keep it depressed, and even if pushing up investment, can not push it up enough, similarly.

              So are you saying this is not true?

              If so, not sure how you are missing all causes and all effects that exist.

              If printed money is scarce in H-O, the US could just print more of its own, than accept the structured surpluses of others. But money and savings isn’t scarce, so we just see asset prices rise, and the impacts I have discussed previously.


              • Then, money isn’t privately held in the development models.(required by H-O)

                See the growth of Sovereign Wealth Funds, see 3/4 of all Lending going to Government linked entities in China, also 86% of savings in the banking deposit system, with only 14% in hands of households (household savings).

                See use of MITI in Japan, lending quota’s to industries, per quarter, and GDP targeting in (some) East Asian Development Models, and the cozy relations between Banking, Gov and Industry in Europe, to the degree that the Hartz Labor reforms could be implemented in Germany. (and importance of banking previously, otherwise)

                All (of the) policy interventions with implications, and created flows, that impact others.


              • This is all well and good, but I fail to see what it has to do with this discussion. My initial assertion was that trade wars are a guaranteed loss for both sides and that current account deficit is irrelevant as regards to the welfare of a nation’s people because importing and exporting are both beneficial, so who cares if you’re doing more of one than the other? Your comments are rich in detail, but light on argument, what do German labour reforms or Chinese Sovereign Wealth Funds have to do with anything?


                • Trade Wars are not a loss to all. In the 1930’s were a loss to US because it was the largest trading nation in World, with highest Surpluses and was flowing its surpluses to world. Britain fared much better and was in the opposite position to US at the time, and such is why they fared much better.


                  Experience would show that the ability of a nation to trade, to produce and to exist in a socially optimal fashion can be impacted by any number of influences. These stem from choices at the individual level to the national and global.

                  Wealth Funds and Labor Reforms

                  They are government interventions, either money not held privately and/or alter structure of GDP (to raise savings, while not raising investment, meaning surpluses that) hold impact further afield and alter/impact the terms of trade.

                  Similarly as has the openness of the US Financial system and Consumer markets. The welfare of a nation exists further afield than the cost of a good, especially as what is complicit in that cost of a good, is complicit in suppressing wages, shuttering going and viable concerns, increases income and wealth inequality and alters the opportunity horizon, and diversity of opportunities of intervention

                  While many economists are happy to imagine that supporting ideals in a world that is cycling otherwise, as an example, is of benefit, and while I teach the subjects I speak about (at graduate and under-graduate levels), and have had the opportunity to live in each region of the world but Africa and South America, most people are living their lives, raising their kids and might not seek to fulfill the needs of an idealized vision of the world (under the premise of static economic models), when there is non-market interventionism impacting their family and society’s life in meaningful ways on a daily basis.

                  They are not light on argument, they are directed, pointed, well-founded and true. As opposed to, governments can impact the money supply by adjusting interest rates (please). Global ZIRP and countries can do what? In models, easily enough, real world, many more elements to the calculus.

                  10 years ago I was in a country that had 24% interest rates, today they have 6%. Global interdependency, global impacts, too much savings due to the collapse of global demand, more debt-printed savings bloat sloshing around the system, debt cycling vertical, and no, investment decisions insofar as flowing excess printed surpluses of industrial policies into other economies are not merely well or porrly placed as they have real impacts on the structure of open economies and financial systems. Sorry. It’s over.

                  And yes, all mentioned here and in previous posts impacts whether we have trade creation or trade diversion through the use of the many levers that are of importance in impacting business decisions (from choice to make or buy, to sourcing and siting).

                  For example, the choice to site in China has been for many reasons, usually stated on the Finance is Economics news media that it is need for competitiveness, labor arbitrage and new market filled with opportunity, but…..no one mentions the tax abatements, the low-cost loans to MNC’s on the back of debt-printed savings, and any number of other state supports influenced the siting of FDI in East Asia.

                  There is more to a well-functioning market economy than cheaper goods and higher asset values.


                  • I still have no idea what you’re trying to argue – as lot of countries do a lot of foolish things, I fail to see why this should be interpreted as an invitation to join in. China’s economic policies are subsidising the US to their own detriment – they’re spending their own revenue enriching US consumers. I get why people in China might find this a problem, but there’s no reason for Americans to worry about it.


                    • You realize there is a world that exists (outside of revenues and profit). There is a social utility to market economics. There are many more aspects and considerations important to Man and Society than merely an Economy. Man exists, and markets are to serve many human and social functions which exist beyond mere material acquisition.

                      They are spending their revenue to…..what?

                      Perhaps a few years of meditation on Why what you suppose exists, exists (in terms of spending their revenue), will yield the answers you require and a refinement of your perspectives in regard to what is occurring, further what is important, especially, in regard to the premises you need support, in support of free markets, to imagine that no one wins in Trade Wars. .


                      • So now you’re proposing some kind of intangible spiritual harm caused by China having a slightly larger manufacturing sector? I suppose any game can be zero-sum if you work hard enough to define it as such.


                        • No quite tangible as described, trade diversion is trade diversion and countries do it to gain pieces of others demand, not to provide revenues to give cheap products or whatever you mentioned in another post.

                          The use of non-market interventionist policy is to divert trade (trade diversion industrial policy versus trade creation free market premise), and gains from trade, are from trade creation, not we have created all these policies to steal your demand.

                          Specialization occurs of trade creation because of advantages, not we use interventionists policies to specialize on the back of market interventions to structure the stealing of others demand, decade in, decade out, in perpetuity.

                          Quite phenomenol.
                          Zero Sum is the basis upon which interventionists intervene, no gains from trade, under conditions of trade creation, only trade diversion, with all of the policy based interventions that you as an economist should be aware of, or can learn of, as I have stated it in previous responses, those are where all the inefficiencies and welfare reducing dysfunctions come from (verticality of debt, excess savings, weak consumption dynamics, ever-growing reliance on debt).

                          Trade diversion is Zero Sum, Trade creation occurs when all policies equal, even interest rates and prices, and currency adjusts to negate surpluses. .

                          But as one who uses a few phrases from the Free Trade pantheon, you know this, correct?


  4. After reading the comment section and feeling like a complete idiot I think that a compliment for the writer of this piece is in order. It is completely understandable for someone not versed in economics and economic theory. Chapeau!


    • I’m with you Mark. I kind of understood the original writer and was like “hmmmm…interesting.” But the more I read the comments the more it felt like I was listening to wizened rabbis discussing the Talmud – fascinating but quite inscrutable. :)


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