June 12, 2018
Donald Trump’s tendency to make things up as he goes along naturally prompts a strong reaction from people who try to approach issues in a serious way. But serious people can sometimes get carried away in this reaction.
Glenn Kessler, the Washington Post’s fact checker, got a bit carried away in trying to set readers straight on Trump’s bizarre claim we have a $100 billion trade deficit with Canada. (We do have a trade deficit, but it is closer to $20 billion.) In his Fact Check piece, Kessler asserts:
“If overall trade increases between nations, people in each country gain, no matter the size of the trade deficit.”
This is not necessarily true. Let me go through two cases, one in which the countries are below full employment and one in which they are at full employment.
Suppose in the first case one country, let’s say Denmark, decided to subsidize $100 billion of exported cars to the United States, displacing $100 billion of domestic production. The immediate effect of the increased imports from Denmark is a loss of output and employment in the United States.
In principle, the Danes have another $100 billion to buy goods and services from the United States, but suppose they don’t like anything we sell. In the textbook story, they would dump their $100 billion on world currency markets, driving down the value of the dollar. This would make US goods and services relatively cheaper, thereby causing us to export more and import less, possibly fully offsetting the $100 billion in increased imports.
But suppose the evil Danish central bank used these dollars to buy up US government bonds, as many countries have done over the last two decades. This would keep the dollar from falling. The purchase of US bonds would have some effect in lowering US interest rates, but this would be just like the Fed’s quantitative easing policy. The lower interest rates would boost demand, but not nearly enough to offset the $100 billion increase in our trade deficit.
So, in this below full employment story we end up with a situation where trade has increased by $100 billion, but the US is left with lower employment and output. It sure looks like it has been hurt by more trade.
Now let’s take a full employment story. Suppose to get even with Trump for calling him weak, Justin Trudeau decides to open his doors to US medical patients. Taking advantage of the lower fees paid to physicians in Canada, he offers major surgeries for half of the price that is charged in the US. He also arranges a service whereby MRIs and other scans can be quickly read by Canadian radiologists for less than half the price charged in the US.
This is a case where most people in the United States will clearly be winners since they will get lower cost health care. However, US doctors will be big losers, since they will see their wages depressed as the demand for physicians in the United States plummets.
In this story, we could certainly say that the country as a whole gained and there were large numbers of winners, but the doctors would be correct in arguing that they were big losers. Now, we could restructure the picture to have Trudeau subsidizing the export of manufactured goods to the US, displacing large numbers of manufacturing workers.
This would drive down the pay of manufacturing workers, and because manufacturing is a source of relatively well-paying employment for less-educated workers, this could mean that non-college educated workers more generally are losers. This argument has been drawn out more carefully by Paul Krugman and Josh Bivens. In this case, most of the workforce would end up as losers, even if the country as a whole may still gain since the minority of winners benefit more than the losers lose.
So here are two clear stories where more trade does not necessarily imply that the country gains. (There are also issues about trade possibly foreclosing the development of specific industries, but we’ll leave that one out for now.) This doesn’t imply that Trump has a remotely coherent strategy in his battles with our trading partners or that we are likely to end up better off as a result, but there are some legitimate issues with our patterns of trade even if Trump may have no idea what they are.
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