Trade and Exchange Rates

The Treasury report notes that nine countries are now on a ‘Monitoring List’ of major trading partners that account for a large and disproportionate share of the overall US trade deficit. The list comprises China, Japan, Korea, Germany, Italy, Ireland, Singapore, Malaysia, and Vietnam.

In June, the US president followed this up by accusing the president of the European Central Bank of currency manipulation. He tweeted ‘Mario Draghi just announced more stimulus could come, which immediately dropped the Euro against the Dollar, making it unfairly easier for them to compete against the USA. They have been getting away with this for years, along with China and others.’

We invited our US panel to express their views on whether the trade balances between the United States and other countries are indeed the result of policies designed to maintain lower exchange rates against the dollar or otherwise tilt the playing field of global trade.

We asked the experts whether they agreed or disagreed with the following statements, and, if so, how strongly and with what degree of confidence:

(a) Mexico’s persistent bilateral trade surplus with the United States implies that Mexico is following policies that keep the peso artificially weak against the US dollar.

(b) The existence of a multi-year trade deficit of Country A with Country B implies that B has successfully tilted the playing field in its favor in terms of such policies as tariffs, non-tariff barriers, and the exchange rate between them.

Mexico-US trade and exchange rate

Of our 43 experts, 39 participated in this survey, and on the first statement, they were unanimous: weighted by each expert’s confidence in their response, 37% disagreed and 63% strongly disagreed.

Among the short comments that the experts are able to include when they participate in the survey, Larry Samuelson at Yale explained the basic principle: ‘There is no reason to expect bilateral trade balances to match; a surplus may reflect many factors other than an artificially weak currency.’ And his colleague William Nordhaus at Yale noted: ‘Bilateral balances are irrelevant measures for trade position.’

Aaron Edlin at Berkeley and Kenneth Judd at Stanford both made the useful analogy with our day-to-day personal interactions. Edlin said: ‘Not necessarily. I run a persistent trade surplus with my employer. I want their money but not their goods.’ Judd added: ‘Bilateral trade balances mean nothing. I run a very large trade deficit with Safeway, Apple, Walgreens, and many other entities. So what?’

Maurice Obstfeld at Berkeley and Jose Scheinkman at Columbia focused on Mexico. Obstfeld commented: ‘On this theory, the peso would be weak against non-USD currencies too and they would have big surpluses with everyone. They don’t.’ Scheinkman pointed out that: ‘Mexico follows an inflation target. Peso depreciated in part because of Trump’s antics.’

A tilted playing field?

The second statement widened the focus to any bilateral trade relationship and any policies that might seek ‘unfair competitive advantage in international trade’. Weighted by each expert’s confidence in their response, there was near unanimity: 27% disagreed and 72% strongly disagreed with the proposition that a persistent trade deficit reflected a playing field successfully tilted in favor of the surplus country.

Christopher Udry at Northwestern went back to basic principles: ‘The more important reason is that there is absolutely no reason that trade should balance between any two countries in a multilateral world.’ Maurice Obstfeld added; ‘Bilateral imbalances may simply reflect the international specialization of production activities.’

Robert Hall at Stanford said: ‘Wrong – for example, US deficits, aka capital inflows, reflect high investment opportunities here.’ And David Autor at MIT revealed the flaw in this kind of thinking about trade balances: ‘Why does China run persistent surpluses with US but not Germany? Hard to believe currency manipulation can explain both!’

Evidence

In comments on both questions, Pete Klenow at Stanford provided links to related research evidence, noting that ‘ Trade balances reflect saving-investment imbalances and real exchange rates reflect productivity differences (tradable versus non-tradables).’

And Anil Kashyap at Chicago quoted ‘Paul Samuelson: the one proposition in all of the social sciences which is both true and non-trivial is comparative advantage.’

All comments made by the experts are in the full survey results.

Romesh Vaitilingam
@econromesh
June 2019