The very first on the list of executive actions that his administration would implement from “day one,” according to U.S. President-elect Donald Trump in his November 21, 2016, video clip, involved a U.S. retreat on trade: “I am going to issue a notification of intent to withdraw from the Trans-Pacific Partnership, a potential disaster for our country. Instead, we will negotiate fair, bilateral trade deals that bring jobs and industry back onto American shores.”
Three days after the video came out, the Wall Street Journal published an article I wrote in which I explained why I thought many analysts were wrong about the implications of a U.S. retreat from the Trans-Pacific Partnership (TPP). In the next two weeks, I received a lot of queries about my article and the reasoning behind it, and so I thought it might be helpful if I set it out at greater length.
Before jumping into the full argument, I think the main points can be summarized in the following seven statements:
- If the United States withdraws from its central role in global trade and capital flows, most analysts seem to expect a major global shift from a U.S.-dominated trading regime to one dominated by China. It is virtually impossible, however, for this to happen because the U.S. regime is built around large trade deficits, making it incompatible with a China-centered regime for which large trade surpluses at its center are a structural necessity.
- In a world of capital scarcity and high investment demand, membership in a trading regime built around large trade and current account surpluses is rewarded by access to equally large capital exports. In a world of abundant capital and weak demand, however, trade benefits countries if it creates additional demand in the form of a rise in net exports.
- The five decades after World War I, from roughly the late 1910s to the late 1960s, were dominated by the devastation wreaked by two world wars. These left the global economy with both a scarcity of savings and a great need for investment. The United States during this period ran large trade surpluses and capital account deficits as it exported its excess savings to fund its net exports while the growth of its trading partners was constrained by their urgent investment needs. Because they benefitted from access to U.S. savings, it is not surprising that large American trade surpluses and capital exports made it the indispensable center of global trade.
- After the belligerents had been substantially rebuilt, the next five decades, from roughly the late 1960s to the present, have been a period of abundant, and even of excess, capital, driven by high savings and weak demand. What is more, unless there is a major war, or a technological breakthrough that requires investment on the scale of the railroad manias of the nineteenth century, abundant capital will probably characterize most of the rest of this century. During this period, the United States has accommodated the excess savings of the rest of the world by running large capital account surpluses (that is importing capital), which has meant of course that it also has run the corresponding trade deficits. Because economic growth among its trading partners benefitted from trade surpluses to grow, it is not surprising that the large American trade deficits of this period have allowed the country to continue as the indispensable center of global trade.
- The Chinese economy is structurally incompatible with what is needed to replace the U.S.-centered trading regime of the past five decades. Members of the U.S. regime have been rewarded with the higher growth associated with trade surpluses, whereas members of a China-centered regime will be penalized with lower growth. The impact of shifting from one regime to the other is the equivalent of a demand contraction on average for every country of 2.0–2.5 percent of GDP.
- The consequence of a U.S. withdrawal from global governance, in other words, is unlikely to be an orderly, rules-based global trading system in which leadership has shifted from Washington to Beijing. Far more likely is a return to the pre–Bretton Woods days of trade conflict and beggar-thy-neighbor policies.
- The only way for the world to avoid devolving into an unstable global trading regime is if leading nations gather to design and enforce a new system for global trade—effectively a new Bretton Woods—but this time more like the sustainable system proposed by John Maynard Keynes rather than the unsustainable one around dollar centrality proposed by Harry Dexter White.
Is the United States in Retreat?
TPP is a trade deal signed in 2015 between a dozen countries that together account for around 40 percent of the global economy. Although TPP is often seen as another in a line of treaties aimed at liberalizing trade further, a more important goal may have been to “raise the bar” on trade, and to set up a body of rules, including on environmental and labor issues, with which to create pressure for countries like China to comply. The agreement has yet to be ratified by the U.S. Congress, and it has often been described, especially by the Chinese press, as the economic component of U.S. President Barack Obama’s pivot to Asia and hostile to Chinese membership. That certainly may be part of the TPP strategy, but no more so than to create a more level playing field for countries like the United States whose manufacturers are often forced to comply with stricter domestic regulations while competing with manufacturers abroad who are not.
Donald Trump has nonetheless made very clear that he regards TPP as part of a complex of arrangements that together hamper U.S. growth, and he seems determined that Washington withdraw from setting and enforcing the rules of the global trading regime. For most analysts and policymakers, Trump’s message spelled the end of TPP, or at least a significant rewriting of the agreement. Japanese Prime Minister Shinzo Abe warned just before Trump’s video aired that without Washington’s involvement, TPP “has no meaning,” pouring cold water, in the words of the Financial Times, “on proposals for the other eleven members of TPP to go ahead without the US.” Japan went on to ratify TPP later that week anyway, mostly, as the Wall Street Journal characterized Abe’s words, for symbolic purposes, in the hope “that parliament’s ratification of TPP would send a message about the importance of regional free trade.”
The real meaning of Trump’s announcement is almost certainly not limited to TPP. It represents a rejection of the central role played by the United States in the governance of the global trading system. It has always been a fundamental, albeit highly controversial, part of Trump’s campaign platform, and one that resonated with a substantial portion of his supporters, that this system has been gamed by participants and creates significant costs to the United States in the form of lower growth, higher unemployment, more debt, and devastated industries throughout the country.
Unfortunately, the debate over trade is highly politicized and is almost never concerned with specifying the conditions under which interventionist policies can be helpful or harmful to the economy. Much of the controversy is fought along ideological lines, which is why the reaction to Trump’s announcement was fairly predictable. Traditional free-traders immediately condemned his statement, and traditional interventionists praised it.
There was, however, little disagreement among analysts for whom geopolitical affairs take precedence. Trump’s decision to withdraw from TPP was widely seen as detrimental to the United States both because it would lead to a reduction in Washington’s influence globally and because the dramatic reversal of a policy pursued energetically by the past administrations, Republican and Democratic, would likely reduce American credibility among its allies.
Trading Economic Disadvantage for Political Advantage
While their near-term assessment of the geopolitical impact may be correct, the longer term impact may be less than many assume. It might even be positive, depending on whether it is primarily the relative strength of the U.S. economy that determines Washington’s ability to influence global events or whether it is the complex of alliances, defense pacts, political relationships, precedents, and shared cultural and political values that are the key to U.S. predominance. If it is the former, withdrawing from TPP and similar agreements may strengthen Washington’s hand over the longer term. If it is the latter, a very strong geopolitical case can be made against Trump’s decision.
Contrary to what we might first expect, however, those who oppose Trump’s decision on economic grounds (that restrictions on American trade are harmful for the U.S. economy) and those who oppose it on geopolitical grounds (that these treaties expand U.S. power and influence abroad) might not truly be allies except at the most superficial level. If foreigners accept Washington’s leadership in international affairs in exchange for participating in American trade agreements, it is usually because they believe that there are significant economic advantages to agreements that give them unfettered access to U.S. markets. While it is perfectly possible that both parties gain economically from these trade agreements, the claim is too often merely asserted (and buttressed mainly by the repeated cheerful chirping of the phrase win-win).
In some cases, it is true that agreements are win-win and both parties gain. It would be dishonest, however, to deny that there are many cases—involving not just developing economies but also advanced ones—in which foreign counterparts have steadfastly refused to give American businesses the same access to their markets as their businesses have received from American markets. In these cases, in other words (and there are many of them), trade partners act as if it is contrary to their economic interests to grant to American and other foreign businesses the concessions that Washington is willing to grant them.
There can only be three explanations for this policy asymmetry: first, that foreign leaders are extraordinarily stupid or uninformed; second, that some fundamental (and as yet unexplained) structural difference between the United States and other economies cause these trade concessions to benefit the U.S. economy and harm theirs; and third, while these concessions are indeed costly, Washington is nonetheless willing to grant one-way concessions for reasons of state.
Whether or not the third of these explanations is the correct one, there is a long American tradition—stretching back unambiguously at least as far as former U.S. president Richard Nixon, and probably much earlier—in which Washington has accepted trade agreements which Commerce and Treasury officials privately argued were disadvantageous to American businesses and workers. But these agreements were nonetheless explicitly justified by foreign policy priorities, although publicly the administration usually justifies these concessions by claiming that the United States still gains economically by opening its own market, even if others don’t reciprocate.
Those who oppose Trump’s decision on geopolitical grounds, in other words, might agree with the economic arguments of those who support Trump’s decision on economic grounds, and disagree only with their relative assessment of the political advantage. But while there may be controversy over the benefits to the United States of the current global trading regime, much less controversial is that the benefits and costs within the country are asymmetrically distributed. While many sectors, especially financial institutions and businesses that are able to arbitrage global value chains, undoubtedly benefit from the continued asymmetrical opening up of U.S. markets in goods and services to foreigners, and households benefit as consumers from lower prices for imported goods, the very uneven distribution of costs and benefits domestically penalizes those Americans most vulnerable to unemployment in the tradable goods sector and to burgeoning consumer debt.
These are also the sectors that may have most strongly supported Trump during the elections, but opposition to TPP is not limited to Trump’s supporters. Former Democratic presidential candidate Bernie Sanders, for example, also opposed TPP and the complex of trade agreements of which it is part. An article was published in the Guardian a week after Trump’s November 21 announcement, for example, by former Sanders supporters and anti-trade activists, that extolled the death of TPP which, the authors argued, died not just because Donald Trump was elected but rather because “an unprecedented, international uprising of people from across the political spectrum took on some of the most powerful institutions in the world, and won.” The authors are Evan Greer, a transgender activist; Rage Against the Machine guitarist Tom Morello; and Canadian actress Evangeline Lilly, none of whom are likely to be typical Trump supporters.
Can Beijing Take Up the Challenge?
But while opposition to the system of which TPP had become the symbol is not new and is supported across the political spectrum, Trump’s announcement nonetheless came across internationally as a bombshell. The most widely articulated concern was that Trump’s rejection of TPP would exacerbate the geopolitical repercussions of an aggressive Beijing displacing an inward-looking Washington as leader and guarantor of global trade. Typical of this view is a statement by Deborah Elms, executive director of the Asian Trade Center, in reaction to Trump’s November 21 announcement that he would immediately issue a notification of intent to withdraw from TPP: “This is very depressing news. It means the end of U.S. leadership on trade and the passing of the baton to Asia. At a time of slowing economic growth, the world can ill-afford watching the largest economies turn inward.”
That baton, Fortune warned the next day, “would be gleefully received by China.” China was not invited to become a TPP signatory presumably because it did not meet the standards written into TPP membership. Beijing had proposed a rival trade pact with less stringent conditions that had largely agglomerated existing trade agreements, known as the Regional Comprehensive Economic Partnership (RCEP). It excludes the United States but includes Australia, New Zealand, Japan and twelve other Asian countries.
It seemed to many that if TPP—an agreement designed largely by Washington and with the U.S. economy at its heart—withers away, its signatories would formally or informally withdraw in favor of a more active Beijing-led RCEP, an agreement designed with the Chinese economy at its heart. Leadership of the global trade and capital regime, in that case, would shift from Washington to Beijing, and this concern seemed confirmed by statements coming out of China. For example Tu Xinquan, an economist who has advised Beijing on trade issues, told reporters that “if the U.S. gives up its leadership here, of course China will take the role.” Meanwhile, during his APEC speech in Peru, Chinese President Xi Jinping pointedly championed globalization and took pains to present China as a bulwark against a rising protectionist tide around the world.
There were even more extreme reactions. Chinese exports are certainly no longer subsidized to nearly the extent that they were a decade ago—especially since 2012, when the greatest of these subsidies, highly repressed interest rates, began to disappear—but it is still hyperbolic to proclaim that Beijing, in the words of one excited American journalist, is “free trade’s new champion.” China’s massive trade surplus is not as much the result of explicitly mercantilist policies implemented by a cynical Beijing as many critics insist, but it isn’t the “natural” outcome of Chinese efficiency and hard work either.
China Relies on Trade Surpluses
Like nearly all persisting trade surpluses, China’s trade and current account surpluses are the results of domestic demand distortions.1 These distortions, in China’s case, are ones Beijing has been trying to address at least since a famous March 2007 speech by former premier Wen Jiabao. It hasn’t done so largely because of powerful opposition from what the Beijing press excoriates as the “vested interests.” As a result of these distortions, Chinese households retain the lowest share of GDP perhaps ever recorded for a large, diversified economy and, with it, the lowest household consumption share. The obverse of its extraordinarily low consumption share is its extraordinarily high savings rate, which has fueled what will one day probably be seen as the largest investment misallocation spree in history.
This demand distortion is key. China’s trade surplus is a residual effect of a domestic growth model that has systematically forced up savings and which Beijing is finding extremely difficult to reverse. That is why despite all the concern, the structure of China’s economy makes nearly impossible a great shift from a world whose trading system is dominated by the United States to one in which China dominates. Even China’s official voice, the People’s Daily, had to point out that same day Trump’s video was released how unlikely it was that China could “overtake [the] US to lead the world.”
What prevents this shift is the role of China’s trade surplus within the structure of the global trading system. Because China’s trade surplus is a residual effect of its growth model, it plays an important part in resolving domestic demand imbalances. Until these imbalances are resolved, high and rising trade surpluses are necessary to manage the stark tradeoff Beijing currently faces between rising debt and rising unemployment.
The reason for this very difficult tradeoff is that economic activity in China has become during the past two decades overly reliant on unsustainably large increases in debt, and any moderation in credit growth will very rapidly cause unemployment to surge. Like all the countries that have followed similar growth models, China has required accelerating credit expansion to maintain current levels of growth in the country’s economic activity. Today, Chinese debt is at least 250–260 percent of GDP. China has managed to meet the GDP growth target of 6.7 percent, the level of economic activity presumably needed to keep unemployment from rising, only by increasing total debt by a frightening amount equal to a 40–45 percentage points of GDP.
Debt capacity limits are the major constraint on China’s adjustment. With each percentage point of the country’s trade or current account surplus substituting for perhaps 10–15 percentage points of debt, China’s trade surplus provides the country’s leaders with crucial breathing space as Beijing maneuvers the necessary changes that will allow China to eliminate its reliance on debt. This reliance, however, is significant. Without the rise in the debt burden, if debt were permitted to grow no faster than the corresponding growth in real wealth, or in debt-servicing capacity (which is much the same thing), China’s GDP growth would quickly fall to 3 percent or lower.2
The following five points summarize in simplified form the sequence of conditions that drive the need for China to retain large surpluses on its trade and current accounts:
- Chinese debt levels are extremely high and growing too rapidly largely because the growth in Chinese investment is greater than the economy’s ability to absorb it productively. To rein in credit growth, Beijing must force a sharp deceleration in investment growth, which, because investment growth is a substantial source of economic activity, means laying off a large number of workers employed in investment-related activity.
- But to prevent a potentially destabilizing surge in unemployment, Beijing must also implement policies that increase the growth rate of consumption by enough to absorb these workers.
- China’s household consumption rate is among the lowest ever recorded in history because Chinese households retain a share of GDP that is also among the lowest ever recorded in history. Consumption growth is constrained by the growth in household income, and an investment deceleration puts downward pressure on the growth in household income by raising unemployment levels.
- The only way for Beijing to speed up household income growth sufficiently is through wealth transfers from local governments to Chinese households equal to at least 1–2 percent of GDP every year, a policy to which there is substantial opposition from those to whom the Chinese press refer as the “vested interests.” This transfer is a five-year to ten-year process at best.
- The amount of time Beijing has in which to arrange the transfers depends on China’s debt capacity, the limits to which may be reached in as little as two years, depending on a number of variables, including of course the rate at which debt is growing. It currently takes an increase in debt every year equal to an alarming 40–45 percentage points of GDP to generate Beijing’s targeted GDP growth rate of 6.7 percent. If we assume that China’s current account surplus is 2 percent of GDP, a current account surplus set at zero it would require an increase in debt every year equal to 60–75 percentage points of GDP to generate Beijing’s targeted GDP growth rate, and an increase in debt every year equal only to 15–20 percentage points of GDP if it were double.
Might Doesn’t Make Right
China, in other words, must maintain large surpluses as a crucially important debt-management tool. But this need for surpluses makes it incompatible under current global conditions with leadership of a global trading regime. To see why, we must consider how the United States, after decades in which it had the world’s largest economy along with a nonetheless negligible governance role, finally came to dominate global trade. The United States became the world’s largest economy by the early 1870s, but for the next forty years the political strength of the silver constituency in the country undermined Washington’s perceived commitment to the gold standard and its chaotic and crisis-prone banking system undermined its financial credibility. By the end of the nineteenth century, the country had been running large trade surpluses and had transformed itself from a major net importer of foreign savings to a fairly large net exporter,3 but it continued to play a negligible role in global governance.
There is, by the way, a widespread misunderstanding that often crops up in discussions about the rise to major reserve-currency status of the renminbi and that also sheds light on the implications of Trump’s decision on TPP. While there are many useful points of comparison between the U.S. economy in the 1920s and the Chinese economy in the 1990s and 2000s, there are also some fairly inept ones. Many commentators have noted for example that between 1914 and 1918, the United States was transformed from the world’s largest debtor nation to the world’s largest creditor. It was also during this period, according to these commentators, that as a consequence of the change in U.S. creditor status, the U.S. dollar was transformed into the world’s dominant reserve currency. By analogy, given China’s status as a leading creditor nation, the renminbi must soon become either the leading or one of the two leading reserve currencies.
There is a great deal that is misleading or simply wrong about this narrative, but the relevant point is the mistaken attribution of the rise of the U.S. dollar to the emergence of the United States as a net exporter of capital. In fact, the country had been exporting capital for nearly two decades, and the U.S. transformation from the world’s largest debtor to its largest creditor is far less significant than it seems. The Great War simply accelerated an already existing trend, transforming in four years the net asset position of the United States that might have otherwise taken a decade or more.
A Century of Dominance
So does this mean that American net capital exports were irrelevant to the emergence of the United States and the U.S. dollar to global centrality? No, but they seemed irrelevant before the war because during this time the world’s major economies confronted, as they do today, capital abundance driven by high levels of income inequality.4
This will become clearer as we examine more closely the 100-year period during which the U.S. dollar took center stage and the U.S. economy became the center around which the global trading system was organized—even though by well before the middle of the nineteenth century foreign trade had become, and remained, a relatively small share of the U.S. economy. This timeframe really consists of two different periods of conveniently equal time spans that represent two very different stages in the process.
The first stage ran for roughly five decades beginning with World War I (1914–18) and included World War II (1939–45). Not surprisingly, these two highly destructive wars dominated this stage, and the extent of their destruction left nearly all of the world’s major economies acutely short of the savings needed to fund the investment for their reconstruction. The great exception was of course the United States, which began that period as the world’s largest surplus nation and its main exporter of savings.
This put the United States at the center of the emerging economic order. During the two-decade period of relative savings abundance before 1914, U.S. trade surpluses and capital exports gave Washington little leverage in world governance. The Great War accelerated U.S. economic growth, along with the excess of American savings over investment, so that it began the 1920s with a huge savings imbalance, like that of China today. Unlike today, however, this savings imbalance existed in a world in which the war had caused income and savings in most major economies to collapse, while simultaneously creating enormous investment needs. The American ability to export large amounts of savings almost immediately put it at the center of global trade and capital, although during the 1930s it became clear that once trade contracted sharply, American demand imbalances could create the same kinds of problems for the U.S. economy as those China faces today.
Whatever partial rebuilding occurred during the interwar period, however, was more than reversed by wars during much of the 1930s and the first half of the 1940s, so that global capital scarcity continued for at least another decade or two. This ensured that massive American capital exports, which were not enough even to prevent the famous dollar shortage of the 1950s, were of vital importance to the world’s major economies. The ability to export excess American savings kept Washington at the center of governance in a global system in which Europe and Japan rapidly rebuilt their economies.
By the late 1960s, conditions were different. The advanced economies had been rebuilt, global savings was abundant, and other forms of demand determined growth rates for most economies. Rather than access to scarce capital, they wanted from global trade the ability to expand demand by increasing exports of tradable goods while constraining imports or, put differently, to export capital. With its flexible financial system and the gradual elimination by the 1970s of all capital restrictions, the United States was able quickly to adapt, and began running large trade deficits whose costs, in the form of unemployment and consumer debt, it was willing to absorb for geopolitical advantage, the importance of which soared during the Cold War.
We are now living, in other words, in a global environment of savings abundance, in which the surpluses most economies want to run are on the trade account, not the capital account. This is the key reason China cannot replace the United States. Participants in a trading system whose dominant member, like the United States, runs large, persistent deficits, are able to grow faster because of the net exports they are able to run—the counterpart to U.S. trade deficits—that add demand to their economies on average equal to about 1.5 percent of GDP every year.
On the other hand, in a trading system whose dominant member must run large and growing trade surpluses, like China, participants must absorb the net imports that are the counterpart to China’s trade surpluses. These net imports subtract demand from their economies equal to a little under 1 percent of GDP every year, and so they must accept lower growth as the price of membership. To switch from a U.S.-centered system to a China-centered system, in other words, represents a reduction in demand currently equal to between 2.0 percent and 2.5 percent of GDP every year (although in some years it would have been as high as 3.5–4.0 percent of GDP). The only countries for whom membership—with its attendant demand squeeze of 2.0–2.5 percent of GDP—does not entail lower growth are undeveloped economies that urgently need capital to fund domestic investment. These will willingly join the latter system if it ensures their capital imports, but of course there are likely to be limits on Beijing’s willingness to invest in these low-credibility economies.5
In this global environment of capital abundance we may have reached an inflection point in which savings abundance continues to characterize the global economy but the willingness and ability of the United States to absorb excess savings is at an end. For the first three decades of this second stage (from the late 1960s to the present), Americans ran deficits willingly, but more recently over the past two decades, with the U.S. share of global GDP much lower than it was fifty years ago, with income inequality higher, and with the Cold War over, the costs have become much harder to bear and the geopolitical benefits less pressing for an increasingly isolationist American public, especially as these costs tend to be higher in periods of slow global growth when countries replaced faltering productivity with mercantilist policies.
Leadership Has a Cost
And there is no longer any question for some Americans that mercantilism has indeed been a policy response by many of its trade partners to slow growth. While China is usually singled out for its policies, other countries have behaved more irresponsibly, most notably rich Germany, whose surpluses, the largest in history, were built primarily on an undervalued currency, after the creation of the euro, and on weak wage growth, after the 2003–05 labor reforms.
Growing opposition to trade, particularly among Americans most vulnerable to unemployment and consumer debt, was probably inevitable, and for the reasons listed in the Guardian article referred to above. But if an American retreat really is about to take place, rather than reorganize under Beijing’s leadership and around the surpluses China requires, it is far more likely that the world’s economies would be forced into domestic adjustments of various levels of difficulty, and respond with a mélange of industrial and trade policies aimed at easing the adjustment. To the extent that these policies force adjustment costs abroad, other economies will be forced to respond, and over time global trade will become unstable and increasingly contentious—and especially difficult for today’s surplus countries—in a way that is in fact closer to the historical norm than the anomalous stability of the four decades before 1914 and the six decades after 1945.
A U.S. retreat from trade, in other words, will be damaging to global prospects. Many economists argue that it will also necessarily damage U.S. prospects, but they are almost certainly wrong. While there is no doubt that clumsily designed and implemented policy interventions can be disruptive for the U.S. economy, there is historical evidence that intervention can easily benefit diversified economies with large, persistent trade deficits, especially when these deficits are driven at least partly by distortions abroad. The case that most resembles that of the United States today is probably Britain in the 1920s, when its trade account was adversely affected by large foreign purchases of sterling for reserve and investment purposes. The British economy significantly underperformed that of both the United States and its continental rivals, with nearly a decade of unemployment in excess of 1 million insured workers.
This changed dramatically after London succumbed to strong protectionist pressures, took sterling off gold in September 1931, and imposed the General Tariff in 1932 (with additional tariffs before and after in 1931, 1934, and 1935). As Barry Eichengreen writes of the British economy, “Its performance compares less favorably with Europe’s in the ‘twenties, when it persistently lagged its Continental rivals, than in the ‘thirties, when it closed much of the gap that had opened up in that earlier decade.”
The strongest argument against trade intervention is that it tends to raise consumption costs for all households by increasing the costs of the imported component of consumption. This might be a classic fallacy of composition, however. Inflation is a structural issue and depends on variables that affect the amount and velocity of money. For there to be inflation, demand for all goods must rise relative to supply, and demand for consumer goods and services is a function of household income. If trade intervention leads to higher prices on imported goods and services, and there is no other effect, higher prices for imported goods and services will reduce the income available to pay for non-imported goods and services, and this will put downward pressure on their prices. The two will balance out. Trade intervention is only inflationary, in other words, if it causes total household income to rise—perhaps by putting unemployed workers back to work or by putting upward pressure on wages—in which case households are still better off.
At any rate, inflation is unlikely to be a problem in a world suffering from disinflationary pressures, and would be even less of a problem in an overconsuming economy like that of the United States than it would be in economies—like those of Germany, China, and Japan—whose consumption levels are held down by hard-to-reverse distortions in income distribution. Certainly the empirical evidence does not suggest that mercantilist policies are inflationary, or that counter-mercantilist polices that allow foreigners easier access to one’s market are disinflationary. Japan in the 1980s did not suffer higher inflation than did the United States, nor did Germany after the 2003–05 Hartz reforms suffer higher inflation than did Spain, Italy, France, and Portugal. In both cases, in fact, it was the reverse: mercantilist policies seemed to be associated with lower inflation.
Some economists argue that even if there are short-term benefits to American producers and workers, over the longer-term trade intervention is harmful for U.S. productivity growth. This argument, which seems more ideological than empirical, is based on standard trade theory in which there is an implicit assumption that any intervention will drive trade performance away from its optimum, so that the United States always gains from the further opening up of its own market, even if trade partners don’t reciprocate. There are at least two problems with this argument. First, it doesn’t seem to conform to historical precedents, most especially American historical precedents, that suggest trade intervention has indeed been a successful part of many countries’ growth strategies. In fact, with the exception of a few, small trading entrepôts whose needs are radically different from those of larger economies, it is hard to think of a single advanced economy whose period of most rapid growth has not benefitted from, or at least coincided with, trade and industrial policies.
Second, the idea that any U.S. intervention necessarily pushes the U.S. economy from an optimum in which productivity is maximized simply does not make sense. It is easy to design models that show how mercantilist policies in one country, whether intended to be mercantilist or not, can push another country away from its previous equilibrium, so that if the second equilibrium is closer than the first to the optimum, trade policies can clearly improve productivity. And if the second equilibrium is not closer, trade policies just as clearly can improve productivity if they force a return to the first equilibrium. This is just logic. The claim that trade intervention is always value-destroying or always value-enhancing cannot be other than ideological. We must develop a framework in trade theory that recognizes the conditions under which specific interventionist policies can enhance or undermine long-term growth prospects, after which we must apply that framework to current circumstances.
Can We Redefine Global Governance?
If Washington does retreat from its global leadership role in trade, the world does not necessarily have to face a return to the contentious and unstable trade environment that characterized, for example, the interwar period. If a Trump administration were to fulfill another of his promises, although not one listed among the promised executive actions in his video announcement, and were to implement a major infrastructure-rebuilding program in the United States, the extent of the increase in productive investment might substantially rebalance global savings with higher global investment, resulting in higher growth, and not with lower global consumption, resulting in lower growth.
But even if the United States does embark on a major infrastructure investment program, this is only a temporary measure that does not address the root problem, which is the decreasing ability of the United States to maintain large deficits that balance the desire of its trading partners to run surpluses. One way or another, either Washington implements specific interventionist policies that reverse the U.S. deficit, or eroding U.S. credibility will eventually accomplish the same purpose.
In that case, the only way of preserving the benefits of stable global trade is if well before then Washington were to convene a meeting of major trading nations, as it did in 1944 at Bretton Woods, to design a new regime that is harder to game and that allocates costs sustainably. It is probably too much to expect that the world will be convinced of the necessity of re-ordering global trade until after many difficult years have finally convinced all the major players. But an alternative may be for a much smaller group of major economies with similarly aligned incentives to take the lead and establish a new framework which is less dependent on the ability of the United States to absorb deficits and on the use of the U.S. dollar as the main reserve currency. Advanced economies with persistent external deficits such as the UK or Australia might be natural candidates for membership. Advanced economies like Germany and Japan would strongly resist because while they refuse to recognize that they have any responsibility for creating the global imbalances, paradoxically they understand that they have benefitted tremendously from their abilities to amass U.S. dollar investments, and would resist any constraints. This is why voluntary constraints probably cannot work. To pressure compliance, Washington should not rely on trade-directed policies but rather should make it difficult for countries to purchase unlimited amounts of dollar assets.6
This group would gradually admit new members as their financial and legal institutions became consistent with those of the original members, so that the share of total trade that would be managed according to the rules of this new trade regime would grow eventually to encompass most of the world’s economies. Some will argue that this is exactly what TPP proposed, but TPP may have been undermined only partly because of what it actually accomplished in liberalizing trade. What may have killed it was the perception that it was an extension of a trading system that many Americans opposed, and certainly it was widely perceived to be as much an instrument of U.S. geopolitical ambitions as a trade agreement.
Capital Drives Trade
One weakness is that within the rules of TPP there were no substantial provisions to address the deepest distortions that force the United States to run large deficits. There was almost no focus on capital account restrictions, or on rules limiting foreign central banks from amassing U.S. dollar reserves, or on other mechanisms that allow the United States to protect itself from massive net capital inflows. Capital account restrictions were neglected even though for several decades it has been pretty obvious that the persistent U.S. surplus on the capital account has become the main driver of the deficit on the current account, and not the other way around.
This relationship between capital and trade flows is an extremely important one that is yet widely misunderstood. The necessary reforms in the design of a sustainable global system of trade and capital regime must deal with reforming the governance of capital flows as much as trade flows. I discuss the relationship between capital and trade flows in chapters seven and eight of my 2013 book, The Great Rebalancing, as well as in various other writings. Others who have written extensively about the topic include Jared Bernstein, a former economic adviser to Vice President Joe Biden, and Kenneth Austin, a monetary economist at the U.S. Treasury.
Using various related frameworks, we show in our work how two aspects of the capital account that are widely considered to be evidence of U.S. economic strength—the dollar’s dominant reserve currency status and the global “insurance” role of U.S. assets created by the safe haven status of the U.S. economy—have in fact undermined through the trade account the ability of the U.S. economy to grow without debt ever since the global savings shortage was resolved and reversed, sometime beginning in the late 1960s. This aspect of the balance-of-payments logic creates in the dollar not the exorbitant privilege of French, Russian, and Chinese nightmares, but rather an exorbitant burden for the U.S. economy.
Although it has only been in recent years that a much wider public is beginning to recognize the complexity of a relationship that is often dismissed as “merely” an accounting identity, we are not the first to note a causal relationship that seems to bewilder many economists.7 This relationship underlay the vigorous debate in the 1920s between Jacques Rueff and John Maynard Keynes on how the shift in central bank reserve accumulation from gold to sterling would adversely affect British trade and unemployment, which Keynes had argued his 1913 book, Indian Currency and Finance was a matter of “comparative indifference.”
The abysmal British economy of the 1920s, however, caused Keynes eventually to reverse his position and by the 1940s he clashed with Harry Dexter White over his determination to embed the U.S. dollar within the global regime that would emerge from the 1944 Bretton Woods conference. Except for a period in the early 1960s, when Robert Triffin explored what became known as the Triffin Dilemma, in which foreign hoarding of U.S. dollars was linked to persistent U.S. trade deficits, the relationship between the capital and current accounts seems since then to have mystified most economists, including those specializing in trade, even as U.S. trade deficits and foreign capital inflows soared, and as the growth in international capital flows, once consisting largely of trade finance, exploded relative to trade flows and relegated trade finance to minor importance.
Without an understanding of this relationship, however, it will be impossible to design a global trading system whose structure cannot be distorted or gamed, and it was probably a failure of the 1944 Bretton Woods Conference that Keynes was unable to convince White about the risks. Until the roles of variables that affect both the capital account and the current account (which includes the trade account) are fully recognized within the trading regime—with the latter probably taking primacy during periods of savings scarcity and the former during periods of savings abundance—a new global trading system, whether or not it is centered on China, will be even less sustainable and more easily disrupted by imbalances than the current system.
This is probably the greatest weakness of TPP, and why even if for geopolitical advantage Washington had continued its support, underlying opposition would continue to grow anyway. But rejecting TPP should not mean the rejection altogether by Washington of the very idea of a stable, rules-based trading system. The world is better off with such a regime, and we must remember that the animating spirit behind the 1944 Bretton Woods conference was the determination never to return to a world like that of the 1920s and 1930s, in which international trade was a zero-sum game of beggar thy neighbor. The sooner a new global trading regime is established with clear rules and stronger incentives for all members to behave responsibly, the better it will be for the United States, the better even more it will be for the world, and the better most of all for today’s surplus countries.
I would like to thank Guy de Jonquières and Kenneth Austin for reading early drafts of this essay and for providing comments.
Notes
1 As I explained in a June 2015 book review of The Leaderless Economy, by Peter Temin and David Vines, large and persistent trade surpluses are nearly always the result of policies that have distorted domestic demand, usually policies that force down the household share of GDP. This is most obvious in countries with the largest surpluses today: Germany, China, and Japan. The only exceptions historically have been the persistent trade surpluses run by advanced economies that export savings to developing economies, like England during much of the nineteenth century when British savings were absorbed by the tremendous investment needs of the United States. Of course German, Chinese, and Japanese capital exports to the United States contradict the historical precedents.
2 There is no way of calculating China’s sustainable GDP growth rate—i.e. the growth rate at which the country’s debt-servicing capacity grows at least as rapidly as the debt itself—but since 2010 and earlier I have been unable arithmetically to get the numbers to work at much above 3–4 percent annual GDP growth, except by assuming implausibly large wealth transfers from local governments to ordinary households. What is more, although mainstream economic models implicitly—and often explicitly—assume that rising debt burdens have minimal effects on overall GDP growth prospects, in fact I would argue that corporate finance theory makes clear that once debt burdens exceed some threshold (one that necessarily varies—contrary to claims made by Carmen Reinhart and Kenneth Rogoff—according to the specific conditions, institutions, and debt structures of each country), increases in the debt burden must necessarily put increasingly severe downward pressure on economic growth, a claim more than amply supported by an enormous amount of historical data. If so, then to the extent that my original estimate in 2010 that China’s sustainable growth rate was 3–4 percent, it must be lower today and will continue to drop until Beijing can rein in the growth in debt.
3 A significant share of this export of savings took place in the form of workers’ remittances and interest and dividend payments on foreign investment, which are usually listed in the standard accounting classification as current account outflows, not as capital account outflows. For our purposes, it is more useful to think of them as capital account outflows to make explicit their relationship to the gap between U.S. savings and U.S. investment.
4 It is not a coincidence that this is the period that saw the emergence of the insights of British economist John Hobson and his American counterpart Charles Arthur Conant on underconsumption, the consequences of excess savings, and the role of capital exports in late nineteenth-century imperialism.
5 In this case, it is clearly win-win if China can export capital to these low-credibility countries if there were some way of assuring repayment. China would benefit from running the corresponding trade surpluses, and they would benefit from the badly-needed capital with which they would build infrastructure.
6 One way of distinguishing “good” inflows from “bad inflows might be to take a leaf from the Chilean playbook of the 1980s. In 1991, Santiago imposed unremunerated reserve requirements in which a portion of any capital inflow had to be deposited at the central bank for a specified period, at no interest. The effect was to impose an asymmetric Tobin tax whose value varied according to the term of the investment—it could be prohibitive for short-term investments but negligible for long-term investments. Taxes can also be set according to the nature of the investment, with FDI receiving favorable treatment, and short-term portfolio flows receiving unfavorable treatment. Economists will complain fairly automatically that taxes on inflows distort the most efficient global capital allocation and so will reduce total global output, but it is hard to argue that capital flows today are driven largely by the efficient allocation of capital from less productive investments to more productive investments when capital flight, speculative currency plays, and reserve accumulation seem to play so large a role, or when among the largest capital flows are those from less developed economies to the United States, which violates even simple notions of efficient allocation. It is also hard to argue that the allocation of capital in the United States has been far more efficient after the elimination of capital restrictions in the late 1960s and 1970s than it was before.
7 A country’s current account (which for our purposes can be thought of as the trade account) must balance its capital account. This accounting identity, however, does not establish the direction of causality, which must be inferred in other ways (causality in any case usually runs both ways). It is probably safe to say however that trade had primacy for much of history, and the capital account usually adjusted to balance trade. This is almost certainly no longer true, although much trade theory implicitly assumes it still is.
Comments(31)
Could you provide a definition of current account and capital account? This is a great article but I don't think I understand these two accounts correctly. This seems like very basic terms. In that case why appeares general understanding is wrong?
A Current Account - the net balance in the trade of a country in goods and services. A Capital Account - the net balance in the movement of money into and out of a country.
Did Chile manage to stop speculative capital from flooding the country?
No. There's no way to really do that other than to contract liquidity. Of course, China hits its growth targets by providing as much liquidity as the system needs in order for those targets to be reached. The only way China can reduce the size of its bubble is by reducing its growth rates.
As always a brilliant essay by Prof. Pettis. But I would like to raise one issue that was not mentioned here. That of demographics. Some geopolitical theorists like Peter Zeihan have been arguing for some years, that it is the demographic inversion (more old people than young) seen across much of the developed world plus also some developing nations, that is driving the current global imbalances. Since it is mostly the young workers in the 25 - 45 age group who drive consumption, while those in the 45 - 65 bracket drive savings and investments, the huge boomer generation followed by a smaller cohort of young workers is responsible for under consumption and savings glut seen globally. They also argue, that since the demographic inversion has been the most acute and have passed the point of no return in countries like Japan, Germany, Italy, China etc. there is no way they can ever have a domestic consumption based sustainable recovery. The only way they can hope to achieve growth is by increasing exports to US, the only large developed country with a healthy demographics. I would like to know the opinion of economists on this issue.
The wealthy and powerful in each country drive down the wages in their country so to have excess, savings to export. This serves their aggressive drives. They see no advantage to compensating the people in their own country so that they might consume everything produced there. They have no desire to share but seek their own advantage.
Thanks, Atanu. I think there is a lot of confusion, even among economists, between household savings and national savings. The former can be driven by changes in household savings preferences or by demographic changes but, as I have argued many times before, the latter mostly reflects income distribution. Countries almost never have large persistent savings surpluses because of household savings preferences. It is almost always distortions in income distribution that cause these surpluses, and so they can be reversed by policies that reverse the distortions. In China's case, specifically, it doesn't matter much if changes in age distribution cause personal savings rates to rise, and they almost certainly will rise anyway as economic uncertainty rises. If Beijing engineers a redistribution of wealth from local elites and governments to ordinary households, Chinese savings will automatically decline as wealthier households increase their overall consumption.
Thank you again for this essay--I have learned far more from your 10,000 words every month or two than I learn from all the various books by supposed experts on the same subjects over the last few months. I am a little curious as to why so many countries care about the TPP, though, if their primary export market is the US and they already have bilateral FTAs with the US anyway (?) Also, shouldn't the US Dollar be declining by your analysis, since the markets would reprice declining US deficits by bidding up the currencies of the major net exporters (such as the Euro)? This doesn't seem to be occuring, though... Finally, if I recall, the US trade deficit runs to something like $40bn a month--I understand that the US may build infrastructure, but as it is unlikely that it will be able to spend $400-500bn annually on roads and airports (and walls across the US-Mexico border...), what happens to all the remaining excess capital within the US? Does it simply force domestic interest rates even lower? Or does it actually enable an even larger transfer of money to the household sector, thereby creating an even bigger domestic economic boom? Sorry again for all the basic questions, and thank you again for such insightful posts--which, I assure you, are likely far more lucid than my follow up questions probably indicate ;).
Sorry Claire. You need to read and think more. But I'll respond to the first. In order to get the candy(trade advantages), they have to show the proper eagerness to support the geopolitical moves of the US. After all. That's what they're being paid for.
Actually, sorry, but I have another question, in reference to one of your earlier essays on the Rise of the Jacksonians, in which you made the comment that even if Trump won the election, it was unlikely that he would be very successful (I hope I am not putting words into your mouth). If Trump's policies will gratly improve the US' domestic economy and if the economy is the primary driver behind a "successful" presidency, how could Trump possibly not be an extremely successful president and virtually guarantee himself re-election simply by following through on his campaign platform (presuming that he has the lattitude to do so)?
I think it's fair to say that we need to stop underestimating this guy. I thought he could win, but I didn't think he would simply cuz political geography and demographics assured the Democratic candidate of winning the popular vote by 2% minimum. So I came in with the view that he'd need a large popular/electoral vote split to win. That's what happened. I thought he could swing Wisconsin and Michigan, but thought he'd lose Pennsylvania and Florida. The real problem for Trump is political geography. People in urban areas and upper-middle class suburbs. I don't see how that changes right now, but who knows what happens 4 years from now. How could Trump guarantee himself reelection? My first guess would be to focus on rebuilding the Midwest. Where Trump is vulnerable, in my view, is in places like Florida, Texas (I find Texas a huge vulnerability cuz the construction of oil/gas pipelines, the drilling there, etc is really affecting a lot of traditionally conservative, small government types off stuff like eminent domain. If the Texas GOP even loses some of those people, Texas becomes a toss-up nationally), Georgia, and Arizona. Most people think it's the minority populations of these regions that're the problem for the GOP, which is partially true, but the real issue are migration shifts. In places like Arizona, you're seeing California transplants move in as a result of high cost of living. The way to beat Trump is to win some key states that'll swing the election. So the Dems can either run towards what was the industrial heartland or they can run to other coastal or border states in the Union. The real reason Hillary Clinton lost was cuz progressives didn't fully get behind her in the numbers they needed to. They honestly thought it was smart to give up the Supreme Court for a generation just cuz 'eqality' and 'feelings' cuz Bernie. If you're dumb enough to think like that, you deserve what you've got coming your way. I remember reading a Nixon quote discussing how Supreme Court Justices determine the direction of the country more than most Presidents due to the Presidency being so constrained by the forces of American government.
Suvy, you extrapolate too much. You don't have any insight into Texans if you think eminent domain is a primary part of their Libertarian DNA. Texans believe in God, Country and the American Way and not in that order. The American Way to us means nothing gets in the way of business. Texans do not think twice about building pipelines and drilling on formerly pristine lands even if they cross a neighbor's property.
Covering over a hundred years of political and economic history to arrive at a conclusion that points clearly to a way forward. One that may avoid the possible repeat of some of the terrible economic and political moments in the last 100 years of accelerating globalization. Awesome work!
Globalization hasn't been accelerating for 100 years. What's playing out now is playing out somewhat similar to the 30's. We also saw a deglobalization phase in the 70's.
Thanks, Simon.
Thanks, Simon.
Excellent post. I'm extremely confident that the incoming Trump administration will not stand for large, persistent trade deficits. In accordance with his campaign promises on the issue of trade, Trump's already starting to go after China for both its trade policies that hurt American workers and its geopolitical ambitions. Although a Trump administration will pull the US out of the TPP, Trump's already building alliances with both Taiwan and the Philippines. It looks like Trump's working to ring-fence China in the South China Sea. His tweets have actually pointed out the real issues of Chinese expansion and Chinese attacks on American workers. He'll continue to do this. If the trade deficit to Asia is suddenly reverse, we'll see China--and countries linked to China--experience a major drag on growth. And it also looks like an incoming Trump administration wants to rebuild literally everything in the US with regards to infrastructure. This isn't words I'm using. This is coming from Trump's chief strategist: Stephen Bannon. In Bannon's own words, he's tired of "seeing Americans getting f***** over". He's calling for something similar to another "New Deal" and he's talking about how the US will no longer sacrifice its middle class and its workers in order to "build a middle class in Asia". Again, these aren't my words, but the words of Trump's chief strategist.
Well, Trump may increase spending on infrastructure, but does that necessarily translate to wealth distribution within the US itself (as opposed to a disporportionate amount of the money, for example, just being directed to the 1% or 2% or whatever)?
It depends on how he structures it. He laid out an infrastructure plan that'd basically give firms massive tax cuts/credits for them to build any type of infrastructure anywhere, but I suspect that'll be adjusted for other projects wherein that doesn't work. I'd like to see the institution of a federal infrastructure bank built off private capital from the large, consolidated conglomerate financial institutions we currently have. Then, I'd use some kind of a public-private partnership strategy to centrally direct infrastructure across the country. I think Hillary'd have done this, but I don't think Trump will. It's crazy when you interact with people in certain regions of the country where they don't even have basic infrastructure for something like high-speed internet, which I've had for over 10 years. The level of inequality has created huge divides built along political geographic lines that we haven't seen since the Gilded Age. How does this get resolved? I've got absolutely no clue.
Well, Peter Navarro was just chosen to head the trade office. So, if we would speculate that this person would actually do what he wrote about, would that impact the timing of China's debt ceiling? Thanks
It seems like the China hawks are all lining up behind Trump. I believe Navarro to be one of those people. Trump campaigned really hard in going after China. I can't imagine that he just stands by while nothing happens.
Enjoyed reading that. Your ideas seem to line up a lot with another guy I follow Peter Zeihan. He wrote something similar to your piece just recently. Anyways, thanks again.
Thank you for a very lucid and very important article. Clearly, there is an awful lot of explaining to do to overcome the weak analytical framework of many "experts" and ideologues, the interested obfuscation of many "vested interests" in both surplus and deficit countries, the deeply rooted misperceptions from surplus countries of where their sustainable interests lie, the deeply rooted misconceptions from the US about the "exorbitant privilege" arising from the international reserve currency status of the USD, the irresistible temptations for political recuperation from various sides. The path for an orderly and cooperative redesign of the international trade and monetary system on more balanced grounds now appears unbelievably narrow. But that's precisely the strongest reason to make the case in a powerfully logical and dispassionate fashion, just as you have done. Didier Dufau in France calls it "the diplomacy of prosperity". It is indeed badly needed.
This article provided a great foundation for considering the value of trade deals in achieving geopolitical objectives. E.g., perhaps it made some sense to withstand some decades with a current account deficit in order to support the development of countries (then poor) in order to strengthen the position of the U.S. during the Cold War. Today, however, it would seem to make much less sense. Several of the big current account surplus countries are already rich & allies of the U.S. While GDP growth in China has skyrocketed over the past several decades, it would seem difficult to argue that this has benefited the U.S. from a geopolitically. I would like highlight what you wrote on the strongest argument against trade intervention, which I think can be summarized as if we put tariffs (or some other cost) on Chinese goods, then there will be massive increases in the cost of consumption for American consumers. Further, trade surpluses will shift to countries like Vietnam. So we will be left with the same un/under-employment and goods that we cannot afford. I highlight this part of your article because countering this argument is so critical for changing the minds of both policymakers and the American public. My uneducated, knee-jerk reaction is that American consumers seemed to do well for decades before China joined the international trade order. If this is true, it cannot be possible that regular Americans could not carry on happily without a major current account deficit. Many in my family worked for decades in Western Electric's factory in the midwest. Virtually all lacked a college education, but earned a decent living during this period (which I think ended some time around the 80s). All of them retain fond memories of this period & wish such opportunities were available to young Americans today. Anyway, I think it would not only be educational, but a public good, if you wrote more on countering this argument, which intuitively seems wrong to me. I remember you have wrote on how manufacturing in China is not what most Americans think it is (e.g., making toys or iPhones). I think your point was that it was the kind of manufacturing (capital intensive) that could be done in rich countries. It would be interesting to read more on that, particularly to counter arguments that the U.S. cannot manufacture or that manufacturing jobs have been replaced by machines (if this were true on a large scale, one would expect higher unemployment in China). Thanks.
Thank-you for you very thought provoking article. I wonder if China started to pay for intellectual property, as opposed to just stealing it, let say $50 a year per person, would this solve the imbalance. Would it better for this $50 per person per head of the Chinese population, to enter bottom up into the western economies rather than through a deficit. It seems that the US buys what China makes, and China steals what the US creates, to a large extent. From my experience in Asian countries they seem a lot more efficient a making things on mass, than creating ideas and intellectual property. If you has asked a Person from the US to change 10 assorted light bulbs, and compared his performance to a Person from China to change 10 assorted light bulbs, in my experience working with Koreans, who I assume are similar to Chinese in their thinking, the US person would be able to complete the task more efficiently. They are better at solving problems that require a bit of thinking. On the other hand if you asked 10 people from China to change 100 assorted light bulbs together and compared them to 10 people from the US with the same task, I’d predict the Chinese team would win hands down. They are better at organising themselves quicker and working in numbers to achieve a task. I remember reading some time ago how Steve jobs needed to change some specification with the manufacturing of the iPhone screen. He said that in China such a change took weeks, whereas, if Apple had had it manufacturing base in the US, it would take a least 6 month to change the screens. Would Trump be wiser to add more protections for Intellectual property rather than try to reinvigorate manufacturing in the US? If China wasn’t so good at stealing and copying western ideas, would there indeed be an imbalance.
Trump has spoken about intellectual property theft by the Chinese repeatedly. Trump could start demanding that the Chinese pay for using intellectual property of American companies.
I am a retired academic philosopher studying (self-study) economics I find this piece fascinating but also frustrating. The level of detail is enough to confirm that there is a much more rigourous argument underneath. For example the estimate that an extra 1% trade surplus is worth to China a 10-15% debt requirement demonstrates that there is an argument that supporets a calculation. But nowhere near enough for me to guess what this argument might be! My feeling is that the author prefers finance as a means of understanding economics to economics as usally understood (eg in my sophomore level Bernanke text). His 2013 book "The Great Rebalancing" might be more technical (there is a section on some accounting identities) but I expect I would still need some more texctbook knowledge to fill in the gaps. There is a text called "International Financew" by K Pilbeam. Would this be good? Of course the authors own detailed work is paywalled (quite reasonably) and may anyway be aimed at people wanting his detailed oconclusions not the argument/calculation used to reach them.
Thankyou and so glad I have been led to your work. This is one of the very best essays on the current economic situation I have read, So could I ask a question? Germany would appear to be indifferent or simply unable to understand the role its surpluses have within the euro zone in particular (quite apart with the US) and the damge this seems to be causing to the South of Europe where a devalution might have been hugely beneficial. Its curious that the two nations you single out as surplus nations resistent to changing this stance; Japan and Germany were both in receipt of vast US capital inflows after the war. Do you Professor have a view as to why they are so resistant to the idea that surpluses if consistent over years are necessarily unbalancing? Is it as you mention about China a matter of "vested interests"?
Prof. Pettis, I'm glad you are not one of the many framing this discussion with Trump's personality. I can't necessarily say that his tact (or lack of tact) is the right way to proceed on this matter. Obviously relations with China have a much more acute political nature beyond trade. I have always worried that China's regime has only been interested in "opening up" and global trade as long as it had enormous advantages for China while preserving much of the economic status quo (too much wealth concentrated in the hands of local elites and governments at the expense of ordinary households). I hope we can move to a new global trading regime without too much global tension and geopolitical risk. Based on my personal digestion of your column for many years, I thought Trump had gotten further down the curve than any other politician with regards to U.S. trade issues. He deserved his victory for some of his insights that I think many have all too quickly painted as xenophobic and racist for genuine concerns as well as political advantage. I’m not sure any other candidates in 2016 (even Bernie Sanders) would have gotten us far along on this point. Having said that, we would be giving Trump too much credit if we didn’t recognize Britain has already crossed the threshold in regards to free trade. As you have been indicating in your writings, the future of the Euro in countries like Italy, Spain, Greece and Portugal is in extreme doubt. Ancedote: I was in Lisbon over the holidays. One of the bizarre things I witnessed in the tourist zones was many foreign workers from non-EC countries (places like Russia, South Africa, etc.). Here is a relatively poor European country with massive underemployment importing workers. Make of this as you will, I don’t think I have to make any further comment regarding the bizarre nature of this.
Thanks for another great post. I'm trying to tie to together a couple of your points. You explained pretty well why mercantilist policies need not be inflationary and be pretty well connected with income growth. In the next 2 paragraphs, you discuss productivity and why this policies need not be harmful to productivity. The first point related to historical precedents is clear but the 2nd point is not. You suggest that trade policies can improve productivity if the 2nd equilibrium is closer to the optimum (clear) and even if 2nd equilibrium is not, if trade policies drives a return to the first equilibrium (not clear). Are you suggesting mercantilist policies, might result in improved productivity abroad to offset policies and/or improved productivity in the US. The first makes sense (at least directionally) but the 2nd doesn't make a lot of sense. What would drive that other than productivity enhancements that should otherwise occur?
Perhaps another way of looking at mercantilist policies. Perhaps reducing trade deficit doesn't change consumer spending but investment for bring production onshore translates into higher income and thus higher spending?
Comment Policy
Comments that include profanity, personal attacks, or other inappropriate material will be removed. Additionally, entries that are unsigned or contain "signatures" by someone other than the actual author will be removed. Finally, steps will be taken to block users who violate any of the posting standards, terms of use, privacy policies, or any other policies governing this site. You are fully responsible for the content that you post.