September 10, 2016
It is unfortunate that it now acceptable in polite circles to connect a view with Donald Trump and then dismiss it. The result is that many fallacious arguments can now be accepted without being seriously questioned. (Hey folks, I hear Donald Trump believes in evolution.)
The Post plays this game in noting that the U.S. trade deficit with Germany is now larger than its deficit with Mexico, putting Germany second only to China. It then asks why people aren’t upset about the trade deficit with Germany.
It partly answers this story itself. Germany’s huge trade surplus stems in large part from the fact that it is in the euro zone. The euro might be properly valued against the dollar, but because Germany is the most competitive country in the euro zone, it effectively has an under-valued currency relative to the dollar.
The answer to this problem would be to get Germany to have more inflationary policies to allow other countries to regain competitiveness — just as the other euro zone countries were generous enough to run inflationary policies in the first half of the last decade to allow Germany to regain competitiveness. However, the Germans refuse to return this favor because their great, great, great, great grandparents lived through the hyper-inflation in Weimar Germany. (Yes, they say this.)
Anyhow, this issue has actually gotten considerable attention from economists and other policy types. Unfortunately, it is very difficult to force a country in the euro zone — especially the largest country — to run more expansionary policies. As a result, Germany is forcing depression conditions on the countries of southern Europe and running a large trade surplus with the United States.
The other part of the difference between Germany and China and Mexico is that Germany is a rich country, while China and Mexico are developing countries. Folks that took intro econ courses know that rich countries are expected to run trade surpluses.
The story is that rich countries are slow growing with a large amount of capital. By contrast, developing countries are supposed to be fast growing (okay, that doesn’t apply to post-NAFTA Mexico), with relatively little capital. Capital then flows from where it is relatively plentiful and getting a low return to developing countries where it is scarce and can get a high return.
The outflow of capital from rich countries implies a trade surplus with developing countries. Developing countries are in turn supposed to be borrowing capital to finance trade deficits. These trade deficits allow them to build up their capital stocks even as they maintain the consumption standards of their populations.
In the case of the large trade surpluses run by China and other developing countries, we are seeing the opposite of the textbook story. We are seeing fast growing developing countries with outflows of capital. This is largely because they have had a policy of deliberately depressing the value of their currencies by buying up large amounts of foreign reserves (mostly dollars.)
So the economics textbooks explain clearly why we should see the trade deficits that the U.S. runs with China and Mexico as being different than the one it runs with Germany. And that happens to be true regardless of what Donald Trump may or may not say.
By the way, this piece also asserts that “Germany on average has lower wages than Belgium or Ireland.” This is not true according to our friends at the Bureau of Labor Statistics.
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