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It’s Globalization, Not Bilateralization

Monday, April 16, 2018 6:57
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(Don Boudreaux)


Here’s a letter to the Wall Street Journal:

White House trade advisor Peter Navarro’s “China’s Faux Comparative Advantage” (April 16) is a cavalcade of confusions.  Among Mr. Navarro’s many mistakes is his assertion that “Contrary to the textbook model, whereby currency adjustments help rebalance trade, the U.S. trade deficit with China has been persistent.”

I challenge Mr. Navarro to find in any reputable economics textbook a model that shows that currency adjustments eliminate bilateral trade deficits, such as that between the U.S. and China.

He’ll not find any such model, for two reasons.  First, in a world of more than two countries, there is simply no reason – none – to expect any pair of countries to export to each other the same amount that they import from each other.  Trade is global, not bilateral.

Second, in official trade statistics the recorded value of each export is the full price that it fetches from the importing country.  But because today the typical exported good contains inputs from many different countries (including, often, the country to which the good is exported), the reported value of one country’s exports to any other country is not an accurate measure of the amount of value contributed to that good by the exporting country.  This reality lead Robert Feenstra and Alan Taylor – authors of a leading textbook, International Economics – to describe the concept of bilateral trade deficits and surpluses as “slippery.”

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030


Addendum: I go further than Fenestra and Taylor and call the the concept of bilateral trade deficits and surpluses completely meaningless.


If If Trump’s personal physicians were as skilled at medicine as his trade advisors are at economics, Trump’s medical treatments would involve little more than leeches, voodoo dolls, and magical crystals.


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