Wednesday, March 9, 2016

A quick thought on a Paul Krugman article

Paul Krugman writes lots of interesting articles and blog posts on economics.  He recently commented on the trade policies of Donald Trump and his critic Mitt Romney.


Dr. Krugman says : "In fact, a worldwide trade war would, by definition, reduce imports by exactly the same amount that it reduces exports."

This property of trade is a bit short on its completeness.  This is simply stating that an export from one country is imported to another country.  Such a tautology is necessary, but hardly helpful in understanding trade.  Unfortunately, this leaves out the balance of trade of a single country, which is what is really important to that country.  The problem is with what is advertised as “trade” actually is is not trade.  Rather, it is a multi-currency purchase and sale system where each country buys from another in its own currency which is then exchanged for a global reserve currency, such as USD, and then exchanged to the seller’s currency.

By this mechanism imports and exports of a country are decoupled.  A country can choose to import and not export by simply making foreign purchases with currency.  Or, in the opposite extreme, a country can choose to export and not import by simply taking foreign currency for its goods.  More likely the trade is nearly balanced, or goes off to one side for a period of time as with the US where it imports more than it exports and has done so for decades.

But, what’s the long term effect of a trade imbalance?  Don’t imports have to equal exports over the long term?  Why would a country continue to sell to another for long periods of time, i.e. many decades, if it only gets foreign currency for its products?  What would happen to a country that maintains a balance of trade deficit for decades?  Wouldn’t trading partner nations simply stop selling to it after some time?  Well, the US may soon be able to answer this question.

So, what is wrong with moving toward a balance of trade by imposing tariffs when trade imbalances exist for long periods of time?  Wouldn’t that have the needed effect of reducing imports to be more in line with exports?