Credit: Shutterstock photoThere are joint and distributional gains from trade. That a rising tide lifts all boats (joint gains) is nice in theory but how those gains are distributed is critical in the competition among nations.
Within a country, trade exposes some sectors to competition, and there are some who gain and some who lose. The powers of the state were expected to help compensate those who lost, by job-retraining for example.
The Trump Administration is determined to address the large and chronic US trade deficit. Despite the dramatic ongoing improvement in the US energy trade balance, the overall trade balance is deteriorating. Many economists expect the fiscal stimulus to boost US demand for imported goods, even if there are market-opening measures that lift exports.
Top US trade officials argue that the distributional gains have not accrued to America as they should. Other countries are blocking the adjustment process in the foreign exchange market and are giving unfair subsidies and aid to their domestic businesses. The average tariff in the US is among the lowest in the world, but the US trade deficit may not be as large as the optics suggest.
In the early 1980s, when Reagan was President, the US would report the merchandise trade balance and later release the service balance. It is called balance, but the former was always in deficit and the latter consistently in surplus.
One way Reagan diffused calls for more strident protectionism was to have the two balances reported together. This had the effect of producing a smaller overall trade deficit. It made for good politics, and it offered a more accurate picture of US trade.
This anecdote illustrates the importance of how the trade balance is measured. The traditional metric was created when trade was mostly about raw materials and finished goods. One of the characteristics of what has become known as globalization is the intra-firm movement of goods at different stages of production, which has been made possible by modern techniques, enhanced command, control, and communication functions, and the drop in the cost of transportation. In 2015, intra-firm movement of goods and services accounted for 30% of US exports and 35% of US imports.
There have been numerous attempts to provide a more accurate picture of modern trade that 19th-century metrics simply cannot capture. For example, a few years ago the OECD launched a database the looked at trade on a value-added basis. paper last year that argues the shifting of profits offshore by multinational corporations has depressed US GDP and productivity measures. Another consequence is that US exports are undercounted, and imports are overstated. It estimates that a little more than half of what the US counts as imports may actually be made in the US.
Due to the immediate circumstances after WWII, including the US acceptance of discriminatory trade practices to foster European and Japanese reconstruction and an overvalued dollar, US corporates pursued a direct investment strategy to service foreign demand. Sales by majority-owned affiliates of US corporations exceeded US exports since the government's records began more than 50 years ago. In contrast, European companies, rely on exports. Japanese government data suggests it was not until the late 1990s that affiliate sales of Japanese companies exceeded Japanese exports.
I discussed some of these issues in my (2009) book,
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