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A proud member of the reality based commentosphere since 2000. You can find my two Eurocent mainly at liberal and centrist discussion threads, but also at some other surprising places. Also tweeting now, as user "graygoods".

Tuesday, August 17, 2010

Some points about the US trade imbalance

Paul Krugman today agreed with yesterday's NYT editorial which blamed China and Germany for the trade imbalance of the US. He correctly points out that lecturing the Chinese isn't likely to bring any positive results. Actually, I'm sure this can only backfire, since the Asians have been subject to such selfish interference by the West, including military intervention, for too long of their modern history, and with their newfound power and self-assurance won't react positively on more of the same old. You have to take their national pride and sore points of the past into account when dealing with them. So, I totally agree with Krugman on this.

However, I also think that this important issue merits a deeper look into the issues, especially when a world renowned expert on the field of international trade weighs in. Firstly, I would really like Krugman, of all people, to stop talking about the trade balance, and instead use the current account numbers. He should really know better than to use numbers that provide only part of the picture, excluding import and export of services and other income payments! OK, I have to admit, I have good reason for emphasizing this, since Germany had a negative current account during all of the 90s, which should be mentioned when talking about the positive numbers of the last years. But, regardless, the current account is really more important than the trade balance, that's economics 101!

Then, what about the fact that the US had a positive current account (and trade balance) from 1946 to 1976? That's 30 years where the US made huge profits by trading with the rest of the world. That was a period of national wealth. Isn't it a bit hypocritical for Americans now to blame China, a developing country, for having the same era of success? Where there concerns in the US during that time about the imbalance? Did the WH react positively when trade partners where disturbed about the outflow of money from their countries? Can the US reasonably expect China to be more sensitive than this precedent?

Also, as some other commenters to Krugman's posting have pointed out, shouldn't we also look at the other side of the imbalance? The US not only import too much, they also don't export enough. The export numbers of the current account have been stagnating for many years, for instance 2002 was almost the same as 1999, and 2009 was shockingly worse than 2008. So, shouldn't there also be stronger incentives for producing goods that are competive on the global market, and for encouraging exports? A good friend of mine worked for a US corporation for decades, and told me about a disturbing disregard for exports in the management. Almost all of the attention went into the domestic market, where the most profits came from, and nobody invested much work into exporting goods. The managers obviously thought the more complicated foreign business wasn't that rewarding. That mindset has to change for the US to get back to more balanced numbers again!

All in all, imho the problems has more facets that the shallow reporting in the media doesn't mention at all. I hope that at least Krugman will soon find the time to provide a more wholesome analysis here. This is a delicate issue, and false decisions can lead to a trade war and increased tensions, so much more care should be taken to discuss all aspects of the problem. Simply pointing at this year's trade balance is misleading and hypocritical!

(Blog post based on a comment to Krugman's story at his blog)

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