Wilbur Ross trades in the 16th century
Wilbur Ross, the U. S. Commer c e Secretary, is obsessed with the trade deficit. “We must always take heed that we buy no more of strangers than we sell them.” Otherwise, he added, “we would impoverish ourselves and enrich them.”
Oops! Wardrobe malfunction. The quote above comes not from Mr. Ross, but from Sir Thomas Smith, expressing his mercantilist theory in a book published in 1581.
Mr. Ross however does think like 16th- and 17 thcentury mercantilists, who were the protectionists of their time. From the 18th century on, protectionists doctrines were destroyed by economists, but Ross did not get the memo.
Like many in the White House including Mercantilist- in- Chief Donald Trump, Wilbur Ross certainly never read a book on the modern economics of trade. Of course it’s OK not to read economics books, provided you don’t coerce people on the basis of your ignorance.
In an interview with The Wall Street Journal, Ross claims that China would not have been “able to transform itself from a very, very poor, basically rural society to the second- biggest power in the world without a favourable trade balance.” How so? In fact, China had a trade deficit during the 1980s when i ts economy first took off.
Moreover, countries often develop with the help of foreign capital, which is the mirror image of a trade deficit ( or current- account deficit). More foreign investment means a higher value of the domestic currency and, consequently, more imports and less exports of goods and services. Ger- main Belzile, who teaches economics at HEC Montreal, notes that the crucial growth period of the Canadian economy from 1870 to the First World War was marked by recurrent trade deficits.
One major reason the United States has a trade deficit ( and not only with China) is that its residents save too little, so foreign savings are flowing in. The interesting point is that this inflow of foreign investment is fuelled by the federal deficit, which is partly financed by f oreign bondholders. Estimates suggest that the newly issued federal securities purchased by foreigners every year account for nearly all the trade deficit.
This is the only serious reason why Mr. Ross and his boss should worry about the U. S. trade deficit. But instead, the Trump administration is prepared to make it worse by asking Congress for another increase in the debt ceiling.
Except for this public-debt problem, a trade deficit is really nothing to be con- cerned about. Imports are what matters, not exports. Just as we produce to consume, we export in order to import — not the other way around.
Mr. Ross told the Journal that the U. S. “has to absorb the entire cumulative surplus of the rest of the world.” Any country with a global trade deficit (and there must be some, if others have a global trade surplus) has one that is necessarily equal to the total surplus of the rest of the world vis- à- vis itself. If I have a global deficit with beer producers ( I buy more from them then I sell to them), I “absorb” the total surplus they have with myself. This, of course, tells us nothing meaningful, which makes it sound like something a politician would come up with.
An underlying obsession of Mr. Ross — and Mr. Trump — is “the interests of American businesses,” that is, the welfare of producers ( businesses and their employees). Like for the old protectionists, what matters to them are profits and sweat — the more work, the better — not the satisfaction of consumers. Ross even lauds the U. S. sugar quotas, which increase American sugar prices by at least one- third compared to world prices.
The Commerce secretary will find that “the interests of American businesses” are not all on the side of protectionism. About one- third of American merchandise imports serve as inputs to produce other things in America. Large retailers join anti-protectionist businesses because they want to offer the best prices to their customers.
China is mainly a convenient scapegoat in all this, just as Japan was four decades ago. Douglas Irwin, a trade economist at Dartmouth College, calculated that the portion of American consumer expenditures that go to goods imported from China amounts to 1.2 per cent.
It is true that the difficulty and risk of foreign investment in China contributes to the Chinese trade surplus. But the main losers of Chinese dirigisme and authoritarianism are the Chinese themselves. This wrong cannot be compensated by imposing import restrictions to Americans or Canadians.
More knowledgeable and enlightened rulers in other countries should not be intellectually intimidated by Donald Trump, Wilbur Ross or, for that matter, the likes of Bernie Sanders. As the wardrobe malfunction above illustrates, the protectionist emperor is naked.