America's increasingly incoherent trade policy
America is blundering into a set of trade policies that lack any sort of coherent intellectual justification. Here’s the Financial Times, discussing recent US trade talks with the UK:
Other demands could also be highly problematic for London. On currency, the US wants to “ensure that the UK avoids manipulating exchange rates in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage”. Currency matters have traditionally been excluded from trade negotiations, but the Trump administration has injected them into talks, including with China and Japan.
Unfortunately, the US lacks any coherent definition of “currency manipulation”. Or any coherent definition of “effective balance of payments adjustment”. Or any coherent definition of “unfair competitive advantage”. By the way, the UK almost always runs large current account deficits, and will likely continue to do so in the future.
Nowhere is our trade policy more confused that with China. The Trump administration took office insisting that our current account deficit was a huge problem that cost lots of jobs, and also an indication that we had agreed to some horrible trade agreements. The administration then proceeded to adopt policies aimed at boosting investment and likely to reduce national saving rates. Because the current account balance is national saving minus national investment, Trump’s policies will make our current account deficit even bigger, if they are successful.
Once it became obvious that the administration’s policies would not reduce our trade deficit, pundits began looking for other justifications for a trade war with China. Thus the focus switched from reducing American imports from China to opening up China’s markets to US goods and services. And while that’s certainly a less bad objective, it raises another host of thorny issues.
Let’s start with the question of why China should be the focus of our market opening initiatives. What is special about China? Here are a few factors to consider:
1. Some would point to America’s large trade deficit with China. But economists almost universally agree that bilateral trade deficits are meaningless.
2. Some economists do worry about overall current account balances, but China’s overall current account balance (as a share of GDP) is closer to zero than any other major economy in the world. If current account deficits are your concern, then China’s the poster child of good behavior—a model global citizen.
3. Another argument is that China has trade restrictions on imports. Even if those don’t result in a big Chinese CA surplus, they reduce the amount of money that other countries can earn exporting goods to China.
Put aside the question of why that’s any of our business. For the moment, let’s assume it is. That still leaves unanswered the question of why we should focus on China, and not some other country. Consider:
A. China’s probably taken more market opening steps in recent decades than any other economy. Its imports have grown faster than those of any other economy.
B. Yes, China still has many trade barriers, but so does the US. Because these barriers take so many forms, there’s no objective way of measuring openness. But we do know that Chinese imports in 2017 were 14.14% of GDP, whereas the US imported 12.13% of GDP. While that partly reflects the fact that the US has a bigger service sector, it is hard for me to see how those data points are consistent with China being a far more closed economy than the US.
C. And even if China is far more closed than the US, why focus on China and not on other countries with even more barriers facing US firms? Consider India, a country with a population almost as large as China’s. In 2017, the US exported $130 billion in goods to China, but only $25.7 billion in goods to India. If the US government is concerned that foreign countries have trade and regulatory barriers that deprive US firms of potential exports, then India’s the far greater villain. If India adopted China economic policies then US exports to India would soar much higher.
I can guess how government officials would respond to this. They’d say, “China is a much bigger market than India.” Bingo! It’s a much bigger market partly because it is more open to foreign trade and investment. Or they’d say “China has a big bilateral CA surplus with the US”. But we’ve already established that bilateral deficits don’t matter, and in any case the US government is energetically enacting policies likely to make our CA deficit much worse. So if CA deficits do matter, our economic policies are on a disastrous course. (Fortunately they don’t matter, and our economic policies are not on a disastrous course.) Again, is it the CA deficits or the closed foreign markets? There is no coherent argument on either front.
Another argument is that we need to stop China from becoming a great power. But forcing China to further open its market to US investments is a policy almost tailor made to speed China toward great power status. So what are we trying to do?
Because the US does not have a coherent philosophy to justify its trade wars, it settled earlier disputes with Canada, Mexico, and South Korea with mostly cosmetic changes, which made the existing agreements slightly worse. Early reports are that something similar will happen with China. So I’m not claiming that current policy is on a disastrous course—it isn’t. Just that we are needlessly antagonizing our trading partners with no clear advantage to the US.
PS. I actually wrote this post 3 days ago. Ironically, today’s FT reports the Trump administration is now pressing India over trade issues, so perhaps the policy is not quite as incoherent as I had assumed when I wrote the post.
PPS. If you don’t trust Chinese import statistics, consider that Chinese imports can also be derived by adding up foreign exports to China.