Fri 28 Jul 2006
Dan Drezner ‘90, still the most popular of Eph bloggers, reports on the collapse of the Doha round of world trade talks. I wonder what Drezner’s take is on the performance of chief US Trade Negotiator Susan Schwab ‘76. Not everyone on the web is a Schwab fan, or a fan of global trade agreements at all.
Almost no living American has wracked up more experience making trade policy than Susan Schwab, the new U.S. Trade Representative. Her first job in the field was with consummate Washington wheeler-dealer Robert Strauss, who served as the nation’s chief trade negotiator under Jimmy Carter. (Schwab was too junior to deserve blame for the Carter-Strauss decision to permit Japan to dump America’s consumer electronics industry into the grave.)
Yet judging from some of her first comments after being nominated, it’s clear that few Americans have learned less than Schwab about U.S. trade policy and why it’s been pushing the nation rapidly towards insolvency and de-industrialization.
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What President Bush and President Clinton before him have really wanted are low-wage production sites from which U.S. multinational companies can supply the U.S. market - which, unlike Vietnam or Peru and America’s other new third world trade partners, still contains consumers wealthy enough to buy this output. In other words, most of America’s recent trade agreements haven’t been trade agreements at all but outsourcing agreements.
So far, the result has been to push U.S. trade deficits and cumulative deficits to dizzying heights (and increasingly to encourage the foreign purchase of tangible American assets as well as Treasury notes). The willingness of protectionist, export-dependent foreign governments has filled the financial gap created by their own stripping of U.S. productive and earnings capacity.
Eventually, the result will be (1) a protracted nosedive in American living standards as these same governments lose faith in U.S. creditworthiness and start to flee the dollar, followed by (2) an equally severe global downturn as the world discovers that America is irreplaceable as its importer and thus growth engine of last resort.
Consequently, it’s difficult to know which interpretation of Ambassador Schwab’s recent remarks is more troubling: That she rejects this entirely conventional economic analysis; or that she accepts it but plans on leading the nation farther down this path and blaming the messengers for the bad news all the way.
Not sure if Professor Ralph Bradburd would describe this as “entirely conventional economic analysis,” but it’s been 20 years since he taught me economics. Perhaps I need to brush up on my reading!
July 28th, 2006 at 10:06 am
But in the meantime it will have been a heady, materialistic ride on economic credit for the American consumer with the day of payment long postponed. I’m 71 - apres moi, le deluge. My grandkids will have to fend selfishly in an economic world they did not make, but such fending for all people in economic and all other respects comes with the territory of life. If my generation had attempted to create a soft landing for its grandkids, they, someone else or something would mess it up.
July 28th, 2006 at 12:50 pm
Wow, I can’t believe Drezner contends that the United States is heading toward insolvency. The truth is, the debt to GDP ratio is still below normal for the last 50 years and while our trade balance is wide, we only became an international debtor in the last 8 or so years.
Here is how the trade balance works in a few simple questions:
Suppose you are a farmer and every farmer had the same crop yield. Why would you loan your neighbor corn?
The flip side is obviously, why did you neighbor need to borrow corn?
It can’t be because your neighbor had a bad harvest, he had the same one as you did. Instead, its because he had a bad harvest relative to future harvests. Next year, he expects to have more corn than you. If you also expect this, then there is room to trade. Essentially, your neighbor borrows today because he expects higher yields relative to yours in the future. You give him corn and in return he makes a promise to pay in the future, with interest.
Now, starting with WWI, Americans generally had investment opportunities abroad because we did not have to rebuild after wars. So we lent money for the promise to be paid later. We created a savings account with the rest of the world. This continued through the 1960’s as first Germany and then Japan exploded after being rebuilt.
For most the 70’s and 80’s and 90’s we have been running down this savings account. Because suddenly, people believe we are the growth opportunity. Even though we had a trade deficit, we weren’t in “trade debt.” Its only in 1998 or so that we broke even and are collecting debt through our deficits.
Is this a problem? Not if everybody is correct. If the United States is going to be the leading economy over the next 20-30 years, then our trade deficit is natural and frankly, expected.
Thus, Drezner’s argument is self-contradictory.
July 28th, 2006 at 2:33 pm
Sorry, I was confused by David’s post. Replace “Drezner” with “the person who wrote what David posted.”
July 28th, 2006 at 4:19 pm
Richard, Don Boudreaux, in class and in his op-eds/letters to the editor, usually gives the example of almost every person having a trade-deficit with their supermarket, then asking “What has your supermarket bought from you lately?” to point out how silly the idea of a “trade deficit” is.
July 28th, 2006 at 4:44 pm
I have heard the supermarket analogy before, but don’t find it appropriate and more than a little misleading:
Imagine two supermarkets, one owned by Hatfields, the other by McCoys. Hatfields are loyal, but McCoys, can’t trust em.
The Hatfields work at the Hatfield supermarket and buy their groceries there. Absent anything else, the Hatfields are not running a trade deficit here because they exchange one good-labor-for another-food.
The grocery store analogy is fine up to here. If this were the end of the story, we could just expand the economy so that the sum of labor payments equaled the sum of sales. Just as I have a deficit with the grocery store, I have a surplus with UW-Madison. On net, everything equals.
But with trade the way we usually think about it, the story has only begun.
The McCoys, however, while working at the McCoy grocery, spend some of their money at the Hatfield grocery store.
This induces a trade imbalance. Unless the Hatfields use some of this money at the McCoy store, we are out of whack.
This obviously becomes a problem. The trade surplus makes the Hatfields richer and the McCoys poorer. How do the McCoy’s deal with this problem, they borrow from the Hatfields (the Hatfields won’t buy from the McCoy’s but they sure will loan at high rates).
Interest rates, the ability to invest, growth, exchange rates, etc are all affected by a trade imbalance. And this is why the grocery store example breaks down. It neglects that payments out do not have to equal payments in when we expand our view of the economy to a national scale.
Thus, in my opinion, the analogy on the surface is cute but fundamentally wrong.
As I explained above, trade deficits can be good and often (usually?) are, but the reason is far deeper than the grocery store attempts.
July 28th, 2006 at 5:00 pm
Whoops, that was me.