Is Addressing Bilateral Trade Balances the Right Step to Improving Competitiveness?

I find myself thinking a lot on trade balances issues, its implications for a country’s consumption, export and import sectors. Martin Feldstein puts it nicely in this article here by saying “Politicians and economists view trade imbalances very differently. Economists emphasize that the total US trade deficit with the rest of the world is the result of policies and actions at home. Politicians blame the bilateral deficit on Chinese policies that block imports of US products and subsidize Chinese exports to the US.”

Basically, what economists are saying, US is a consumption based economy with a voracious appetite for imports ( Americans consume a lot of Chinese and German products ) and Americans don’t save enough which results in a savings investment gap deficit. (Please see here for an explanation of the savings investment gap)

Politicians blame the fixed exchange rate maintained by China to the US, which results in a weak Yuan against the USD, prompting Chinese to export goods to the US at cheap prices. This argument has been used over and over again by US politicians especially Republicans, which has gain a lot of political support from the blue collar segment of the US population. This is of particular concern because a lot of the manufacturing jobs have gone to China with cheaper labour cost and less regulations. 

A bilateral approach is a country specific approach, meaning two countries work out specific agreements with each other to try to come up with win-win situations. One of the key agreements is what Martin describes as “the Chinese agreed to start importing US beef this summer, rescinding protectionist policies that had been in place for several years. China also agreed to open its market to a range of US financial services. And the US agreed to sell natural gas to China, something that the Chinese wanted but that the US previously had refused to do.” This is good for the US especially for financial, oil and poultry companies. We have seen how how much shale oil the US have to provide to the world, a deep Chinese financial market which has been mostly closed to foreign capital and reputable US beef brands like Angus and NY steak which could appeal to Chinese tastes. 

But US appetite for imports is more complex, the US trade deficit is not expected to improve by a lot since US consumers are still expected to import a lot of products from abroad with its low savings rate and credit fueled consumption and investment. Bilateral trade agreements can only do so much in terms of more market access and promises not to engage in tariff setting behaviours. To address US consumption trends, more radical measures need to be implemented like less credit access to US consumers, higher social security and pension requirements to forcibly increase savings rate, and possibly higher taxes on goods and services. 

In the end, bilateral trade agreements can only address certain things, much of the competitiveness of a country has to be improved through total factor productivity improvement. Case in point, US manufacturing has declined due to increasing labour cost and regulations which has prompted US companies to relocate production to lower cost countries like China, Taiwan, Korea and Southeast Asia. How does the US attract back manufacturing jobs? Much of it would have to lie to its tech industry where increased mechanisation and software optimisation had made it easier to produce products without much labour. But then, this just boils back to the problem of how will US workers fit into this? Blue collar workers will still find themselves locked out. This needs a more fundamental approach, that is education and retraining of the US workforce which is much easier to say, very hard to implement.

Post Picture from Huffington Post

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