Friday , November 27 2020
Home / Scott Sumner /Trade deficit whack-a-mole

Trade deficit whack-a-mole

Summary:
In recent years, the US government has imposed tariffs on a number of nations, notably China. The administration argued that these policies would reduce our trade deficit. Many economists pointed out that the trade balance is basically domestic saving minus domestic investment, and that our highly expansionary fiscal policy would actually make the trade deficit larger. (Budget deficits tend to reduce domestic saving.) And this is exactly what seems to have happened since 2016: Some of the products that were formerly exported from Chinese factories are now being produced in Vietnam.  With a growing Vietnamese trade surplus, the US government has now accused Vietnam of currency manipulation.  Here’s the FT: Vietnam had been one of the rare beneficiaries of Trump’s

Topics:
Scott Sumner considers the following as important: , , , , ,

This could be interesting, too:

Sarah Skwire writes Time, Technology, and Textiles

Scott Sumner writes Is progressivism a scam?

Pierre Lemieux writes Imports as a “Drag on the Economy”

David Henderson writes Casey Mulligan’s Excellent Adventure

In recent years, the US government has imposed tariffs on a number of nations, notably China. The administration argued that these policies would reduce our trade deficit. Many economists pointed out that the trade balance is basically domestic saving minus domestic investment, and that our highly expansionary fiscal policy would actually make the trade deficit larger. (Budget deficits tend to reduce domestic saving.) And this is exactly what seems to have happened since 2016:

Trade deficit whack-a-mole

Some of the products that were formerly exported from Chinese factories are now being produced in Vietnam.  With a growing Vietnamese trade surplus, the US government has now accused Vietnam of currency manipulation.  Here’s the FT:

Vietnam had been one of the rare beneficiaries of Trump’s trade war with China — until now.

Last Friday, the US administration announced late in the evening that it would launch a section 301 investigation — the same process it used to place tariffs on billions of dollars of Chinese imports into the US — to examine the country’s “unfair currency practices”.

Why might the trade bods of the Trump administration be interested in Vietnam? The administration’s tariffs on China have not done much to persuade companies to move their manufacturing back to the US. Plenty have moved over to Vietnam instead, where they can secure cheap labour.

In the past, currency manipulation charges were based on a specific set of rules developed by the Treasury Department.  This no longer seems to be the case:

The inter-agency process here has left people in Washington scratching their heads. Traditionally, the US Treasury is in charge of international financial policy, and it would be it that would decide if another country was intervening in its exchange rate or not. As Mark Sobel, former Treasury official, has pointed out, there are all sorts of reasons that an emerging market currency might be undervalued against the dollar without necessarily indicating government manipulation.

Now the process of labeling a country a currency manipulator seems purely discretionary, based on whether we are annoyed by a country’s trade surplus.  In a recent Mercatus paper, I argued that “currency manipulation” is not a useful concept.

Until the US addresses its saving/investment imbalance, we will continue to run large deficits.  Like a game of whack-a-mole, shutting down imports from one country will merely expand the trade deficit with other countries.

Scott Sumner
Scott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP—i.e., real GDP growth plus the rate of inflation—to better "induce the correct level of business investment". In May 2012, Chicago Fed President Charles L. Evans became the first sitting member of the Federal Open Market Committee (FOMC) to endorse the idea.

Leave a Reply

Your email address will not be published. Required fields are marked *