September 5, 2019

NOTHING THERE THAT CAN'T BE FIXED WITH A SHARPIE:

Trump's Mercantilist Mess (ROBERT J. BARRO, 9/05/19, Project Syndicate)

The reason that countries participate in international trade is to get imports - consumer goods, intermediate goods used in production, and capital equipment - in exchange for exports. Framed this way, exports are simply the goods that Americans are willing to part with to acquire something they want or need.

But international trade also boosts, on net, the size of the overall economic pie, because it means that countries can focus on doing whatever they do best, producing goods in areas where they are relatively more productive. According to David Ricardo's theory of comparative advantage, countries' relative strengths derive from differences in factor endowments. And, as economists Paul Krugman and Elhanan Helpman showed in the 1980s, countries' relative strengths are also related to their investments in various areas of specialization.

By embracing a primitive mercantilist model in which exports are "good" and imports are "bad," Trump has reversed this impeccable economic logic. In a mercantilist model, an excess of exports over imports contributes to national wealth through the accumulation of paper claims (previously gold). This seems to be what Trump has in mind when he complains that China is draining $500 billion per year from the US economy, mostly by exchanging Chinese goods for US Treasury bonds. Needless to say, it is hard to see how receiving a lot of high-quality goods at low cost amounts to "losing."

Posted by at September 5, 2019 9:11 AM

  

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