There is a lot of grumbling that free trade is eroding
economic health in the U.S. There is some merit to these arguments; also, the
U.S. economy hasn’t been very healthy for a long time. Recently, there has
been talk about new tariffs on steel. This has been supported by Wilber Ross,
now U.S. Secretary of Commerce, who, in 2002, assembled the International
Steel Group from assets of several bankrupt steel companies. In 2005, Ross
sold ISG to India’s Mittal Steel Company, for $4.5 billion. Media reports at
the time estimated that this sale price was over twelve times Ross’ investment. (The fact that president George W. Bush slapped new tariffs on
steel, immediately after Ross’ purchases, certainly helped.)
There are a lot of issues surrounding trade – for
example, the tendency of trade agreements to come attached with globalist
institutions that erode national sovereignty. The European Coal and Steel Community (1951)
not only allowed trade in coal and steel, it introduced a whole new
supranational government structure, including three branches of government
and a parliamentary body, that later grew into the European Union. This sort of thing should be avoided with extreme prejudice.
Today’s environment of floating fiat currencies
introduces new problems. The devaluation of the Mexican peso in 1995, shortly
after the passage of the North American Free Trade Agreement in 1994, caused
all sorts of hardship for U.S. competitors that cannot be attributed to any meaningful “comparative advantage.”
Nevertheless, we will try to isolate some of these
sub-issues by asking: would free trade be acceptable if the United States ran
a trade surplus?
A trade surplus would not help the U.S. steel industry
very much. Nor would it help any domestic manufacturers of the sort of thing
you buy at WalMart. But, other U.S. manufacturers (and service providers)
would also be selling an equivalent, or greater, amount of goods and services
to foreigners. This could be things like agricultural products, capital
goods, software, and a wide variety of services including banking or
information technology.
I think most people would feel that this is acceptable.
The easiest way for us to acquire beach chairs is to sell complicated barcode
scanning systems, and then take the beach chairs in trade. At present, gross
exports of goods and services are about 80% of gross imports. The 20%
difference is the “trade deficit.” Today, gross exports of goods and services
are greater than at any time before 2007 – around
12% of GDP. We don’t seem to have any trouble
selling our wares to foreigners. We are selling more to foreigners than ever.
In the 1960s, when the U.S. had a trade surplus, total exports were about 5%
of GDP. Imports, of course, were less than this.
If the amount we sell to foreigners has been steadily
rising, why can’t we manage to run a trade surplus? The reason has to do with
the nature of trade, investment, and savings. Domestic capital creation – basically,
the combination of the private savings rate and corporate profits — in the U.S.
is low. Much of this new capital is then dissipated on consumer lending,
government budget deficits, and capital-related taxes. To fund new
investment, capital must be imported. This appears as the trade deficit.
Thus, if we want to have a
trade surplus, we should generate more capital
domestically, and squander less, to finance domestic opportunities and leave
some left for net foreign investment. This means more gross consumer saving and
less consumer lending; plus, smaller government budget deficits.
Just as, on a personal level, “higher savings” means less
purchasing of goods and services (relative to income), and more acquisition
of real and financial assets, so too the analogous behavior, on an aggregate
national level, would mean fewer imports and more net acquisition of foreign
assets.
Sometimes people ask me: are trade balances driven “by
the goods side,” or “by the investment side”? Actually, they are intertwined.
Let’s take an example: What if the price of oil doubles? Since demand is slow
to change, this would mean a big jump in the cost of oil imports. Certainly,
that has nothing to do with domestic savings, right? Let’s imagine the U.S.
as one aggregate entity trading with the Rest of the World. If higher
spending on oil imports is offset by less spending on other imports, leaving
total spending (and the savings rate) unchanged, then we can see that total
imports do not rise, and the trade deficit is unchanged. Alternately, if the
U.S. spends more on oil imports, but other imports do not change thus leading
to higher total spending and higher total imports, the higher overall
spending is effectively financed by a decrease in the savings rate, and the
trade deficit would increase.
What about the other side? The Rest Of the World gets
more dollars for its oil. What does it do with these extra dollars? In the
first instance, they probably appear as a bank balance in an account at a
U.S. bank – a financial asset. If these extra dollars are then spent on goods
and services, then U.S. exports increase, the “trade deficit” does not
change, and the ROW’s savings rate is unchanged. However, if they are left as
a bank asset, or used to acquire other assets such as Treasury bonds, then the
ROW effectively “saves” the new income, U.S. exports do not increase, and the
“trade deficit” expands. We can see that decisions about savings and
investment do indeed drive the trade account, even in this example.
We should not be too unhappy by the fact that foreigners
invest in our economy – that the U.S. runs a trade deficit. In the midst of
low capital creation today, this finances investment and thus helps create
jobs and prosperity that would not otherwise occur. It would be better if we
could generate lots of capital internally, but in the absence of such a happy
condition, capital imports probably allow a healthier economy than would
otherwise be the case. To put it a little more bluntly – what if foreigners
were banned from all future purchases of Treasury bonds? The trade deficit
might shrink, but you can imagine some of the other consequences.
If we had big pro-business reforms in the U.S., like a
15% corporate tax and other such advantages, then the U.S. would be a better
place to invest. How would the U.S. steel industry be doing if it had low
taxes and efficient regulation (effective but not burdensome) regarding
environmental issues, worker safety, healthcare, legal liability, or a dozen
other things handicapping the industry today? This kind of business-friendly
environment could lead to new investment in steel, and could thus drive an
even larger “trade deficit,” as domestic capital is insufficient to finance
all the available opportunities. This was the case during most of the nineteenth century, as European capital flowed to the U.S.,
some of it financing the original growth of America’s steel giants. During
the 1990s, high-growth Asian economies like Korea and Thailand had high
savings rates and capital creation, but so many domestic opportunities that
they still imported capital and ran a “trade deficit.”
Whenever I look into issues surrounding trade, I come to
the conclusion that most concerns would be resolved by a combination of a
business-friendly environment, Stable Money, and high levels of capital creation. In
other words, the Magic Formula: Low Taxes and Stable
Money. There are still some issues regarding “globalism” that merit
attention, but I think that most people would be happy with the overall
result.
(This item originally appeared at Forbes.com on July 26,
2017.)
https://www.forbes.com/sites/nathanlewis/2017/07/26/would-free-trade-be-ok-if-the-u-s-had-a-trade-surplus/#4a5b8a9b5852
