Trade Policy Stupidity on Parade

http://www.reuters.com/article/idUSTRE5BA3TN20091211

Friday we were treated to a rare display of trade policy stupidity from both sides of the aisle in Congress, with each party opting for different but equally flawed approaches.  As reported in the first Reuters article (link provided above), Senator Reid has sent a letter to Chinese president Hu Jintao, begging him to un-peg the yuan from the dollar in the hope that such a move will correct the trade imbalance between the U.S. and China. 

“I know China is committed to moving to a free floating currency eventually. But China’s currency policy has been causing major distortions in the world economy for too many years already, and is continuing to do so now,” Reid, a Democrat, said in a December 9 letter released on Friday.

“In the mean time, I hope you would consider a significant revaluation to bring the value of the RMB in line with economic fundamentals, and after that, to return to a more robust version of the ‘managed float’ that your government previously maintained,” Reid said.

But, as is always the case in U.S. trade negotiations, we’re all bark and no bite:

Reid stopped short of threatening U.S. legislative action, but warned that “the one-way nature of the imbalances in our economic relationship is a major factor causing Americans to question the efficacy of our trade policy.”

This focus on currency valuation as the root cause of our trade deficit with China is just dumb.  First of all, if currency valuations are the problem, why are we not also demanding that Japan revalue the yen?  After all, in per capita terms (that is, relative to the size of the country), our trade deficit with Japan is four times as large as the deficit with China.  Why are we not criticizing the EU (European Union)?  Our per capita deficit with the EU is almost exactly the same as our deficit with China!  If we’re going to blame our problems on currency valuations, shouldn’t we at least be consistent?

But, secondly, currency valuations aren’t the problem.  The evidence doesn’t support a relationship between currency valuations and trade imbalances.  Two years ago, China did revalue the yuan by 20% vs. the dollar and, instead of falling, our trade deficit with China actually widened.  Since the 1970s, the dollar has fallen by over 300% vs. the Japanese yen.  Yet, instead of falling, our trade deficit with Japan exploded.  More recently, in the past year, the dollar has fallen dramatically vs. both the yen and the euro.  But there’s been no change in price for products imported from these regions.  If anything, Japanese automakers have actually been cutting prices. 

While it seems logical that trade imbalances should ultimately be resolved by currency revaluation, it doesn’t happen because badly overpopulated nations, utterly dependent on exports to sustain their excess labor capacity, overcome the effects of a strengthening currency by cutting costs, by subsidizing their manufacturers … doing anything and everything to maintain their trade surplus. 

Not to be outdone, on the same day, along come the Republicans, oblivious to what the blind application of free trade has done to us, pushing a trio of free trade deals, two of them benign while one is sure to be another disaster. 

http://www.reuters.com/article/idUSN1125942920091211

Republican U.S. congressional leaders urged President Barack Obama to work with them to win approval of long-stalled free trade pacts with Colombia, Panama and South Korea as early as possible in 2010.”We agree with you that these trade agreements provide important new commercial opportunities that will benefit our economy and create jobs without adding to our nation’s staggering budget deficit,” House of Representatives Republican leader John Boehner and three other top Republicans said in a letter to Obama sent late on Thursday.

“We ask that you jump-start the implementation process through your leadership, particularly by promoting all three of these pending trade agreements when you speak to the nation in your State of the Union address,” they said, referring to an annual speech to Congress usually in late January.

Colombia and Panama?  No problem.  We have a nice per capita trade surplus in manufactured goods with both countries.  Why?  Not because of a favorable currency valuation, but because the population density of both countries is about the same as our own. 

South Korea is an entirely different matter.  With a population density fifteen times that of the U.S., it’s no wonder that we have a per capita trade deficit in manufactured goods with South Korea that’s almost double that of China.  Why in the world would we want to repeat the same mistake with South Korea that we’ve made with so many other badly overpopulated nations?  Will we start complaining about South Korea’s currency valuation as soon as such a deal is signed?

Such inconsistent trade policy that’s rooted in theories not supported by the facts is just stupid, and the application of such stupid trade policy for the past several decades has driven us to the brink of economic collapse.  We may yet arrive at the point where Congress begins imposing tariffs to restore a balance of trade but, without an understanding of the role of population density and the accompanying rationale for the use of tariffs, it will be perceived as random, arbitrary and vengeful, and will likely make a complete mess of global trade.  But, then again, from the perspective of the U.S. economy, it couldn’t really be any worse.

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9 Responses to Trade Policy Stupidity on Parade

  1. paine says:

    “The evidence doesn’t support a relationship between currency valuations and trade imbalances. ”
    this is simply wrong my friend

    are you claiming forex rates have no effect on trade flows between currency zones ???

    “Two years ago, China did revalue the yuan by 20% vs. the dollar and, instead of falling, our trade deficit with China actually widened.”
    these are complex dynamic processes
    that may slow or speed a flow from it’s rate without adjustment
    but reverse it’s direction ??
    not if it’s inadequate
    in this case
    the forex shift only restored the status quo ante
    —ie the post mid 90’s yuan deval —

    at best it adjusted for intervening relative rates of productivity growth and inflation

    “Since the 1970s, the dollar has fallen by over 300% vs. the Japanese yen. Yet, instead of falling, our trade deficit with Japan exploded. ”
    that is a silly misreading of the facts

    the yen reval has dramatically slowed japans
    export growth and market penetration

    yes these multi nat operations can dump and price discriminate to maintain market penetration…up to a point and for a certain interval of time
    but not indefinately
    usually they build a plant inside the foreign zone
    and begin to adjust flows from various locations as
    markets and forex change over time
    i note japan as example supreme of this strategy

    “More recently, in the past year, the dollar has fallen dramatically vs. both the yen and the euro. But there’s been no change in price for products imported from these regions. If anything, Japanese automakers have actually been cutting prices”

    these are short term often stop gap effects

    the euro /yen/dollar dance leads to fllow change
    but not for short term flux

    best way to see the global system
    is this
    we have oecd countries
    transitional countries and unemerged back waters

    its the archetecture of the system that shows the game at its most basic

    there is a systematic tilt in valuations between transition economies and oecd economies

    chronic undervaluation vs purchasing parity price calculations
    and it’s not all about population density

    the ruble has had times
    of fantastic under valuation

    i like your surplus divided by population
    as a welfare comparison
    if we are to solve trade gaps i agree we ought to priorities by per capita surplus
    it has less negative welfare impact

    but you unified theory of development by comparative pop=density is but a lovely metaphor that
    mimics reality
    if you are selective enough
    and partial enough
    but why stick to metaphors when more precise and useful alternatives exist

    • Pete Murphy says:

      I’ve provided specific examples that support my contention that currency valuations have little effect on trade. You’ve dismissed them as short-term anomalies. What was our trade deficit with Japan in 1970 and what is it now? Can you provide an example of where a shift in currency valuation has reversed a trade imbalance?

  2. paine says:

    i suspect it’s paranoid zenophobia and mono mania
    ala captain ahab

    your white whale
    is the ever larger foreign hordes
    about to overwhelm us norte americans
    with our beloved euro settler “kultur ”

    borders language and culture
    the phobic reaction can operatte on any one of those fronts as well as simple
    beggar thy neighbor economics

    • Pete Murphy says:

      There is no xenophobia (not “zenophobia”) here, nor is it a matter of racism.

      I challenge you to explain how population growth can be sustained indefinitely and how it will be supported. If you can’t, or if you ever foresee a time when it could become a problem, I challenge you to explain how it can be addressed without taking on immigration.

      “Beggar thy neighbor economics” is a derogatory term used jealously by free trade cheerleaders to describe the highly successful economic policy this nation employed for the first 171 years of our nation’s history to build us into the world’s pre-eminent economic powerhouse. It has taken only six decades for the disciples of Ricardo’s half-baked comparative advantage theory to complete tear it all down. Oh, by the way, if “beggar thy neighbor” economics doesn’t work, why does the WTO enforce it in favor of two thirds of its member states?

  3. paine says:

    mike

    lets keep this generous
    challenge ishardly the mot juste
    and correcting my atrocious spelling is only
    half way helpful

    i’ll let u be the data base
    the percent of gdp deficit run from 77-07
    of japan vis a vis the states
    might put this in persepective for you

    reverse a deficit is not to necessarily wipe it out
    the yen gets fiddled with
    japan has always had a surplus fetish
    even as it has faded as a global trade factor over the last 20 years

    i really think the weight of most economteric studies “discover” a relation between terms of trade and balance of trade

    • Pete Murphy says:

      You “think” they do, but have presented no data to support that claim. That’s the problem with most economists. They “think” that free trade is always beneficial and that currency valuations explain away anomalies. But they’ve never really evaluated the role of population density disparities because they refuse to let the subject of population even enter their minds. I’ve done the research and have compiled a mountain of data proving that disparities in population density are the dominant driving force behind global trade imbalances.

  4. paine says:

    i’m not an open trade advocate
    try to address my very specific point
    the rate of exchange between two currencies will
    influence the flow of trade both ways over time
    nothing controversial here unless you are either utterly refusing to accept this which amonuts to denigning price substitution and income effects

    or
    and i think this is your “theory” of manufactured goods trade

    the effects of revaluation can be fully off set by
    price reductions in you theory right ??
    because production wages of the dense pop trader
    can be compressed limitlessly
    the work force can in effect live on air if need be

    either that or the sparsely populated trader has some floor on the forex value of its currency
    below it refuses to go
    or some sufficiently sluggish rate of import substitution and real income income effects
    either way with these adjustment constraints or rates
    the forex mechanism can’t prevent the immiserizing deluge

    here you come close to the reality i think

    say
    the sparse pop trader has a class of citizens who benefit from an over valued currency
    either they profit off imports or they are buying into the dense pop traders production system
    ie trans border corporations

    i stay clear of stat wars because i’ve seen everything and its opposite mustered as proof by facts

    here i ask you to present a plausible model
    that will nullify forex effects

    i await your reply

    if you are interested in protecting the USA from low price imports of high labor /low resource content
    products
    then forex adjustment plus…plus import licenses are necessary
    not tariffs obviously because the price adjustment is too sloggish
    quotas and by license so the society as a whole gets the “rents” not the importer

    but these measures like export subsidies are rule brakers under wto

    reval is not

  5. paine says:

    the forex fiddle OUGHT to be aggressively ruled out
    by IMF and or WTO
    it isn’t simply because the trans national corporate elite
    controls both organizations and has no interest in sparing north americans any misery that produces a better profit stream for them

    demography is anothe topic
    if you think the earth is too poluated
    think of china’s one child policy

    that effectively haves the population every generation
    if it can be used on a billion people it can be used on 20 billion too now china has a governing elite too
    of course
    just one with patriotic incentives ..so far

    if we consider the globe our home not kansas or manhattan
    then we’ll address over pop just as we will any other earth wide pandemic

    too late ???

    well if the global wwarmersare right that front might indeed have a too late
    but stand alone over pop doesn’t

    elites will impose the necessary reforms even if only to stabilize their global regime

    in fact right now we are in the midst of such a mid course correction on the trade front

    using only the income effect
    ie relative rates of growth
    we stag china booms
    over time that begins to reduce trade gaps

    i point out
    the gap may persist but only at certain relative sizes
    the feed back of debt service eventually closes this gap off at the trade level and reverses it
    here we are talking century long swings of course

  6. Pete Murphy says:

    “the rate of exchange between two currencies will
    influence the flow of trade both ways over time
    nothing controversial here unless you are either utterly refusing to accept this which amonuts to denigning price substitution and income effects”

    So what you’re saying is that you’re not able to provide examples of where changes in currency valuation have reversed trade imbalances. I, on the other hand, have provided specific examples of where changes in currency valuation have failed to have an effect. The facts speak for themselves.

    You then go on at length about various mechanisms that can be employed by both sides to manipulate currency valuations, and close with “the rate of exchange between two currencies will
    influence the flow of trade both ways over time
    nothing controversial here unless you are either utterly refusing to accept this which amonuts to denigning price substitution and income effects.” I’m not denying the effects. I’m simply observing the fact that they never happen.

    “here i ask you to present a plausible model
    that will nullify forex effects”

    Read the book and you’ll find the model. But it’s a model aimed at the population density effect. Since there is no “forex effect,” it’s impossible to present a model to counter-act it. What’s needed is a tariff structure on manufactured goods that’s indexed to population density. For example, the tariff on manufactured goods from Japan would be set at 40%. The tariff on such goods from Korea would be set at 55%. These tariffs would make imported autos from those countries 40% and 55% more expensive than equivalent domestically-made autos in the U.S. Auto buyers would immediately shift to domestically-produced cars. The goal is not to halt imports from those countries. The goal is to restore a balance. If the balance swings to a surplus, we can reduce the tariffs somewhat. And, if those nations don’t like the tariffs, one option available to them is to immediately begin buying from us as much as we buy from them. Of course, that’d never happen because they’re incapable of consuming at that level. If they were capable of consuming at that level, they’d simply buy their own domestically-made cars.

    I’m not going to change your mind, Paine, so let’s end the discussion here.

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