Sunday, May 13, 2007

The US Current Account Deficit

. Sunday, May 13, 2007
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Monday's New York Times carries a story headlined "Rising Exports Putting Dent in Trade Gap." It essentially mis-represents the most recent Census Bureau report on the US current account. The Times is optimistic...

"As a result, it now looks as if the huge trade deficit, which swelled to a record $765.3 billion last year, could gradually decrease. The trade gap widened in March, mostly because of higher prices for imported oil, but the vast disparity between what Americans import and export is expected to narrow, which would allow trade to contribute to economic growth in the United States for the first time in more than a decade."

Hold on, the trade deficit grew? Doesn't the headline say that the trade gap is dented? Apparently, rising exports would have dented the gap were it not for the even faster growth of imports. Fortunately, however, the Times assures us, March is just a temporary aberration that reflects the fact that the goods we import and can't do without (oil) rose in price in February. So, I guess as long as we can reduce the world oil price, we should be okay moving forward and we can expect rising exports to dent our trade gap pretty soon.

The bigger problem is that the story mistakes a micro effect, that a weaker dollar helps US exporters and import-competing producers, for a macro effect--that the weaker dollar will reduce imports and increase exports enough to balance the current account. The story cites the most optimistic economist on this question--C. Fred Bergsten--to the effect that a 1 percent depreciation of the dollar improves the current account by $20 billion.

And Bergsten is very optimistic about the sensitivity of the trade balance to the exchange rate. According to the most recent IMF World Economic Outlook, "typical estimates from the standard econometric models of the U.S. economy suggest that narrowing the ratio of current account deficit to GDP by a percentage point would require a real depreciation ranging from 10 percent to 20 percent." The re-analysis the IMF reports cuts this range by half (5 to 1o percent). Bergsten's guess is essentially the IMF's 5 percent estimate--the lowest boundary of a single study. One might more reasonably pick a point somewhere in the middle of the more numerous studies (15 percent) or even at the point where the new and the typical studies agree (10 percent devaluation for each 1 percent desired correction). In short, Bergsten is an extreme exchange rate optimistic unrepresentative of the broader research community.

Sadly, stories such as this are a big part of why we are incapable of informed public discussion about our current trade position. If our most important paper of record can't report responsibly and accurately, how can we expect an informed public debate? Instead, we imagine that we can find simple solutions; we look for villains (China, Japan, ...) and think that higher tariffs will somehow solve the problem. All the while, we fail to talk about the real cause of the imbalance: we don't save.

Thursday, May 10, 2007

The New (Protectionist) Trade Policy

. Thursday, May 10, 2007
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And if you remain unconvinced about why more knowledge of economics is besides the point:

Democrats representing the older industrial regions, where jobs have been lost because of imports of cheap textiles, shoes, machinery and other products made in Asia and Latin America, have generally been opposed to free trade deals.

But others in the party are more open to trade. This group tends to represent high-technology and financial services industries, which are eager to gain markets in fast-growing third world countries.

Can someone say "sectoral model"?

This from commentary on the so-called New Trade Policy agreement just announced in DC in which the Bush Administration agreed to Democrat demands to incorporate labor and environmental components in pending free trade agreements with Peru, Panama, Colombia, and South Korea. This does not augur well for the future, as it is all too similar to the waning years of Clinton.

Does anybody remember the Seattle Ministerial Conference?

Bashing China, Again

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A case in point (re Evolution and Protectionism)

"In a rare three-panel subcommittee hearing Wednesday, House lawmakers discussed policy options that might address so-called currency manipulation by China and other countries. The event served as an opportunity for lawmakers on both sides of the aisle to express frustration with China’s undervalued currency and, to a lesser extent, the weakness of Japan’s yen.

Democrats made clear that they intend to push legislation aimed at China, although details are still unclear.

These lawmakers and other critics in the business and labor communities blame cheap imports for China’s skyrocketing trade surplus with the United States and the loss of U.S. manufacturing jobs."

The NYT also has a great piece on the effort to craft a "new trade policy." How much education would it take to transform these legislators into free traders? The one thing they actually could do to balance the current account they refuse to discuss--balance the budget.

Evolution and Protectionism

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Protectionism, and the zero-sum conceptualization of international trade upon which it is based, might be an attitude that we have thus far failed to evolve away from. Or so argues Paul Rubin in today's Washington Post. An excerpt:

"Conflict was common in the environment in which humans evolved. As primates, which are a very social order, our ancestors lived in relatively small groups in which everyone knew everyone else. Our minds are adapted to deal with populations of that size. Our ancestors made strong distinctions between members of the in-group and outsiders, and we still make such distinctions today -- social psychologists can create in-group and out-group feelings based on virtually any arbitrary difference between populations.

The in-group and out-group intuitions help fuel opposition to expanded trade and immigration. The public intuitively believes that the beneficiaries of such policies will be foreigners, and it is easy to arouse suspicion about those who are not part of our in-group. When coupled with zero-sum thinking, this is a powerful political tool. For instance, a domestic industry or collection of domestic workers, when having difficulty competing with foreign or immigrant competitors, can use innate dislike of outsiders when advocating for increased barriers."

I am of two minds. On the one hand, the argument has a certain appeal; perhaps all that we need is more economics education. On the other hand, economists are too quick to argue that protectionism is a function of a lack of understanding and seemingly too slow to recognize that protectionism is simply a reflection of the losers from trade capturing public policy. No amount of knowledge can prevent that.

Monday, May 7, 2007

The First 100 Days

. Monday, May 7, 2007
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Looks likely to be an "interesting" summer in France. Hope no one has plans to visit any of the government-run tourist attractions...According to the International Herald Tribune:

"Before the summer is over, [freshly-elected Nicolas] Sarkozy wants to loosen the 35-hour workweek, cut taxes and curb the power of France's labor unions. "I will not act fast, I will act very fast," he vowed last week."

But in France, the street can matter almost as much as the Parliament, and unions have already pledged to defend their privileges.

Sarkozy's team has pledged not to be cowed by protests.

"We need a strong hand with the CGT in order to send a clear signal to our electorate," Fillon, the former social affairs minister and architect of a pension reform in 2003, told the weekly magazine l'Express on Monday, referring to one of France's two biggest labor unions. The CGT was one of the main organizers of two months of street demonstrations against a youth employment law that was eventually abandoned by Chirac."

Bon chance, Nicolas

Sunday, May 6, 2007

Chavez, the IMF, and Bond Prices

. Sunday, May 6, 2007
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Hugo Chavez asserted his intention to pull Venezuela out of the IMF. The decision was apparently a bit "impulsive," that is, taken without prior discussion with anyone who knows anything about Venezuela's foreign bond situation. As it turns out, Venezuela has borrowed heavily against its future oil revenues ($21 billion) and its bond issues require it to remain an IMF member. "The conditions listed in all the prospectuses would suggest that Venezuela may have all of its global bonds accelerated and due immediately, given cross-default provisions across each issue, if it pulls out of the IMF," said RBC Dominion Securities Inc."

Bond markets reacted predictably; His withdrawal announcement sent debt prices lower this week, bucking a regional trend, and Venezuela's benchmark global bond due in 2027 fell further on Thursday to yield 0.081 per cent higher at 7.247 per cent.

Behind all of this lays the following: "In the past year, [Chavez] has been issuing billions of dollars of international bonds, assuring investors that the Opec nation's oil income would guarantee payments." Things did not turn out so well the last time Venezuela borrowed heavily against future oil earnings. I wonder how things will turn out this time around.

Wednesday, May 2, 2007

"Back to the Future?"

. Wednesday, May 2, 2007
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In a world in which the prevailing trend is to bend over backward to attract foreign direct investment, Hugo Chavez works across the grain by nationalizing the last privately-managed oil field in Venezuela. "The companies ceding control included BP PLC, ConocoPhillips, Exxon Mobil Corp., Chevron Corp., France's Total SA and Norway's Statoil ASA. All but ConocoPhillips signed agreements last week agreeing in principle to state control, and ConocoPhillips said Tuesday that it too was cooperating."

One must wonder what impact this will have on Venezuelan oil output. According to the IHT, "Multinationals pumping oil elsewhere in Venezuela submitted to state-controlled joint ventures last year because they were reluctant to abandon the profitable operations...Since those takeovers, Venezuela's overall output has declined by close to 4 percent, or 100,000 barrels a day, with some companies complaining they have not been paid for the crude they have been pumping. "I expect to see a repeat of that in the Orinoco," he said.

One must also wonder about the underlying motivations--is Chavez is really in this to help the poor, or to help himself?

International Political Economy at the University of North Carolina: May 2007
 

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