Monday, February 2, 2009

Buy American: Is There a Trade-off Between Free Trade and Full Employment?

Paul Krugman gets partial credit for expounding on an argument made by Dani Rodrik (here and here):

The economic case against protectionism is that it distorts incentives: each country produces goods in which it has a comparative disadvantage, and consumes too little of imported goods. And under normal conditions that’s the end of the story. But these are not normal conditions. We’re in the midst of a global slump, with governments everywhere having trouble coming up with an effective response ... how would this change if each country adopted protectionist measures that “contained” the effects of fiscal expansion within its domestic economy? Then everyone would adopt a more expansionary policy — and the world would get closer to full employment than it would have otherwise. Yes, trade would be more distorted, which is a cost; but the distortion caused by a severely underemployed world economy would be reduced. And as the late James Tobin liked to say, it takes a lot of Harberger triangles to fill an Okun gap.


As we noted, Dani was assuming a fixed exchange rate model. I suspect Paul is also assuming a fixed exchange rate model:

And one part of the problem facing the world is that there are major policy externalities. My fiscal stimulus helps your economy, by increasing your exports — but you don’t share in my addition to government debt.


We also noted that Nick Rowe considered the implications of floating exchange rates:

Nick’s floating exchange rate version of the model, however, has the exchange rate automatically adjust such that the ultimate change in net exports is zero. In this case, the multiplier for fiscal policy is 5 and the multiplier for mercantilist policy is zero. In other words, a $200 increase in government purchases still achieves the goal of increasing real GDP by $1000. Lesson learned – floating exchange rates can achieve the same goal as Dani’s mercantilism. There is one difference, however, between the two approaches. Mercantilism often works by protecting the import competing sector. Under floating exchange rates, we are more likely to see increased employment in the export sector.


Let’s expound on this in three ways. First of all – the choice between floating v. fixed exchange rates plus protection (as we noted earlier) comes down to whether one wants the benefits of fiscal stimulus to accrue partly to the export sector v. whether one wants a lot of the benefits to accrue to sectors such as the steel industry. A lot of economists who argue against the Buy American provisions on the grounds of efficiency are implicitly favoring the export sector over the import competing sectors.

Secondly, some rightwing pundits fear that a dollar devaluation will prove inflationary. I think most economists would argue that the kind of real devaluation that Nick is referring to will have only a modest impact on the overall price index. Besides, the Federal Reserve seems to be more afraid of deflation that a little inflation.

The third point comes from several of the comments surrounding Nick’s contribution – that being that we may be in a Bretton Woods II era if the Chinese government maintains a fixed exchange rate. In other words, the lessons learned from Dani’s and Paul’s fixed exchange rate model are not as easily dismissed as applying to the current situation. Paul noted that if we had better international coordination of macroeconomic and exchange rate policies, we might not need protectionism. Alas, such coordination does not seem to be on the horizon.

Update: Nick Rowe adds more to this debate.

32 comments:

Barkley Rosser said...

I am sorry, but history matters. In 1930, the US passed the Smoot-Hawley tariff in order to preserve US jobs. This was a fixed exchange rate world under the gold standard. There was full bore reaction by other countries, most significantly the British Commonwealth ones, but others as well, and world trade declined sharply, certainly exacerbating the plunge into the Great Depression, although the degree of its role remains a matter of debate. However, I am unaware of any economist anywhere who argues that American jobs were saved by this catastrophic policy.

Now there is a hard international political economic reality here that is being ignored. The just-ended Davos conference included fiercesome denunciations of the US for having triggered what is now the most widespread global recession ever. Merchandise trade declined in November at an annualized rate of 45%, while the big conference in Washington supposedly agreed on avoiding protectionism for at least a year, and in mid-January the US put a bunch of trade sanctions on the EU (no more Roquefort cheese to be had in the US anytime soon). Without doubt, such a stupid move by the US would this time also trigger massive reactions and the very serious danger of a full-blown trade war. No way this is going to help the world economy, much less the US one, although certain sectors might do better in the short run (Krugman's argument).

This is just full-bore insanity.
(Oh, and btw, if there is reaction, then there will not be the flex rate reactions assumed in those models either, more garbage).

ProGrowthLiberal said...

Barkley - Senator McConnell also wants the Buy American provisions taken out arguing:

"I don't think we ought to use a measure that is supposed to be timely, temporary, and targeted to set off trade wars when the entire world is experiencing a downturn in the economy"

news.yahoo.com/s/afp/20090202/pl_afp/uspoliticseconomytrademcconnell

Barkley Rosser said...

Is the fact that this is said by someone who is mostly a dumb bell supposed to make it wrong? Part of the problem here is that the Congressional Dems have pretty much all become protectionists. I see this as largely due to the influence within the party of the AFL-CIO, which has a disproportionate number of its members in import-competing industries. That entity was once pro-free trade, but basically has been pushing for protectionism for the last quarter of a century to the point now that I even read occasionally that somehow protectionism is some "traditional" or core position of the Dems. They were more the free trade party up fully until at least 1980, and it is only very recently that this new "partisan orthodoxy" has taken over. Could prove to be disastrous. These are very dangerous times, and an outbreak of a trade war is exactly the last thing we need right now.

ProGrowthLiberal said...

Barkley - you would not be saying that Mitch McConnell is a dumbbell? OK, he is often guilty of saying some really dumb things but I quoted him because I think he has a point.

Eleanor said...

Could we avoid the negative effects of "buy American" by government investment in certain industries (auto) to help them become more competitive, and by government building projects? It's hard to import highways and bridges, though a lot of windmill turbines come in through the port of Duluth. The government could surely figure out ways to maximize use of American products, without a tarrif. I think I'm talking about some of the things Galbraith has suggested, based on the New Deal.

Leigh Caldwell said...

The House of Representatives version of the bill actually has a flexible get-out clause for the Buy American provision:

http://www.knowingandmaking.com/2009/02/buy-american-get-out-clause.html

I have linked to a site where you can read the whole bill including different versions and the Republican alternative, so you may be able to find other interesting facts in there.

Barkley Rosser said...

pgl,

OK. Misunderstood.

Leigh Caldwell,

The House provision is better than the Senate one, which is simply unworkable, if not completely insane. However, under the current circumstances, even the House provision is dangerous. The world at large is blaming us for what is going on to the world at large, and even a small move by us to "beggar thy neighbor" may well trigger a horrendous reaction with catastrophic outcomes.

Anonymous said...

I'm in favor of 'Buy American'. We've had a couple of decades of the opposite, and the result is that our current crisis has, as backdrop, stagnant wages because American workers have been competing with low wage labor. Break this system NOW!

I'm terribly sorry this messes with your globalization "consensus". You should have considered the consequences in your glory days, but oops, you were too busy shafting American labor.

This country needs to re-industrialize anyway, and as long as were licking Chinese boots, it will never happen.

Barkley Rosser said...

Anonymous,

I always love it when people who say stupid things do so anomymously.

It is arguable that labor has been hurt by increasing free trade. But the moment that the world is going into the worst downturn we have seen since the last one that was aggravated by a trade war set off by the US pasing a "job-saving" tariff is the absolutely worst moment to do this. History most certainly can repeat itself, and remember that last time we got Adolf Hitler in charge of Germany as a result. This will not help labor anymore than the 1930 one did. Sorry, but do not engage in delusions.

This is the not-clearly thinking Dem equivalent of the knee jerk nationalism of the Republicans under Bush. He said, "to hell with the rest of the world, we will do what we want." So, we invaded Iraq with massive demos going on all over the world.

In fact he was more able to get away with it than we will be if we pull a protectionist stunt right now. We were (and are) the world's supreme military power, so nobody could stop us. But in trade they can retaliate, and if you do not think that the rest of the world is not already blaming us for the current mess, get it together. They are, and with good reason. After all, it was our housing bubble and its blowup that is at the root of this.

TheTrucker said...

Blogger Barkley Rosser said...

A few things with which I disagree. It is incorrect to equate the "Buy American" stuff in the stimulus package with Smoot-Hawley. That is a HUGE overreach. Even without that, we had a trade surplus in 1930 and we now have a huge trade deficit. The situation is much different because of that. There is no way that the rest of the world (other than OPEC) can harm the actual US producers with tariffs. We import far too much and manufacture and export far too little.

The claim that American producers have not been harmed by free trade is again wrong and all we need do is look at wages since the 1970's. The owners of IP rights have done very well but the actual American producers have gotten the greasy wrench. I cannot see why we should fear a trade war in manufactured goods or in food. such a thing may harm the rest of the world but it will not harm the common people of the USA. I've had about enough of allowing the rich to help the rest of the world by sticking it to the American wage earners. And I sense at least and at last a move in the right direction. When the American economy improves the other nations will benefit from that improvement. Each nation would do well to adopt the same sort of soft trade sanctions.

Barkley Rosser said...

trucker,

If we are not buying other countries' stuff, how are they going to improve when we do, if we do? And, how soft is "soft"?

We have had a lot of damage in our import competing industries, but exports are a larger part of our GDP than they ever have been. It is just whistling in the wind to say that a cut in our exports due to protectionism by other countries will not hurt us.

Sure, if all we do is this rider on steel the House has passed, there probably will not be too much retaliation, and, heck, Bush put protectionism on steel for awhile too, until the US automakers started screaming loudly (save jobs in steel, lose them in autos, duh). But in this case, the Senate wants to make the clause across the board, all industries. That will not fly without some pretty bad retaliation, and a conference bill may well give us a raft of them, if not across the board. This is a train heading for a cliff that needs to be stopped before it gets there, not encouraged with a lot of "not a problem" rhetoric. We are in the most dangerous position the world economy has been since the 1930s, and this is the last thing we need. It does not help at all, and encouraging others to do their own "soft sanctions" will just make it worse.

Bupa said...

We face a global problem.

This is not time for unilateral moves towards protectionism...especially from the country that should be leading the effort for a coordinated policy response to the depression.

Unilateralism should have ended with the Bush administration.

Braden said...

Let me just post a not-so-hypothetical counterfactual. Let's imagine that the "buy America" clause is removed from the stimulus package and that no pressure is placed on employers to invest in production facilities in the United States. I think it's safe to assume that U.S. car manufacturers would dump that money in production facilities located in growth markets, such as China, Brazil (in fact, $1 billion has already been guaranteed to a production facility in Brazil), and Eastern Europe. Thus, America's economy loses at least part of the benefit of spurring consumption by increasing the employment of idle American labor.

Now, this might be offset by lower prices for consumer goods, but then we're stuck trying to sell those goods to consumers less confident in their financial security and earning less than they did before.

A one-time requirement to buy American in a piece of legislation intended to increase employment of American workers seems like a very reasonable measure. Having spent some time working on procurement issues in Europe, I can tell you that in most governments they spend money expecting to hire domestic firms. They're contracting process is usually so opaque that if Barkley Rosser thinks this stimulus package is protectionism then you have to wonder why we haven't retaliated against blatant European and Japanese protectionism for the past fifty years. This is just what most governments do when they spend money.

wjd123 said...

A while back Paul Krugman stated "There’s no obvious reason why consumer demand can’t be sustained by the spending of the upper class."

I can't disagree with this because I live in New York City. Here the rich make fabulous salaries working on Wall Street, buy multi-million dollar apartments in the prime real estate of Manhattan. Their property taxes swell the city coffers, and many people make out very well for themselves catering to their needs.

Now with the financial crisis I have to ask, How long can consumer demand be sustained? The rich are cutting back. The arts are suffering because the rich aren't giving. They are laying off staff and cutting back on the fancy restaurant meals, The city coffers are emptying, and the mayor is raising taxes on the rest of us. And to add insult to injury, President Obama is after them for being irresponsible.

If this goes on, what's to become of our substance? What's to become of the arts, the joie de vibre of the city. Oh! the horror of it all. It so hard for so many when the plantation system goes away.

Chuck said...

Mitch McConnell notwithstanding, a bill designed to stimulate employment for Americans should surely include a provision that the funds provided be used to stimulate employment of Americans.

Jack said...
This comment has been removed by the author.
Jack said...

Why is the support of free trade without any reference to the exploitation of labor by specific trading partners? Is the cost calculation honest if it fails to account for such exploitation? Is WalMart's benefit unrelated to the injury to our own labor pool? The injury is both in lost employment and in the valuation of what employment remains.

Discussion of the financial crisis and the ensuing economic melt down seems only to be focused on the distortion of property values, destruction of credit markets and the loss of jobs.

Shouldn't there be greater attention given to the loss of income amongst the working and middle classes as a causative factor to the economic situation as it now stands? Isn't there a relationship between free trade with certain other countries and the destruction of spending power amongst the majority of Americans?
If workers have lost buying power how are they to contribute to restoring the health of the economy? What isn't earned must be borrowed if the average worker is going to maintain a family. That's obviously not a healthy situation.

save_the_rustbelt said...

Not to worry.

Most Americans will eventually work for the government or Wal Mart.

So who needs manufacturing?

Relax, the economists have this all planned out and it will work really smooth.

ao said...

"A lot of economists who argue against the Buy American provisions on the grounds of efficiency are implicitly favoring the export sector over the import competing sectors."

Or, those economists favor higher level of global output. If you distort inputs by imposing "Buy American" rules then you decrease the amount of output for a given amount of input. There will be less bridges and roads if we have to pay more for the inputs and use inefficient mix of some inputs. If all countries do this the result will be less output from the same amount of input. How is lower global output not an unequivocally terrible thing in a global recession?

Braden said...

"There will be less bridges and roads if we have to pay more for the inputs and use inefficient mix of some inputs. If all countries do this the result will be less output from the same amount of input. How is lower global output not an unequivocally terrible thing in a global recession?"

See, but that's the problem. I understand and support the Ricardian argument, but empirically the worst possible outcome is for one state to reduce trade barriers and unilaterally embrace free trade while the rest of the world maintains high trade barriers. We're the sucker in this argument because we've embraced the ideological love of free trade without much regard for whether the industries for which we have a competitive advantage are allowed free access to markets like China or India.

In addition, other states are actively promoting certain sectors using targeted government intervention (German high-end manufacturing) that creates a comparative advantage for that industry despite input costs (labor) that are significantly inflated. By doing so, Germany also maintains the purchasing power of its citizens, which goes a long way toward insulating their economy from a devastating deflationary spiral.

True believers of free trade need to repeat after me: "Free trade is an idea, not a reality. I will not make government policy based on an idea divorced from reality."

TheTrucker said...

If you actually look at the effects of a "trade war" (a worst case scenario that will not happen due to "Buy American" provisions in the stimulus), the United States comes out way ahead on the deal. And the reason for that is the trade imbalance and the per capita GDP imbalance. If every nation on the planet raises a 6% import tariff those nations with a trade surplus and a huge population get the short end of the stick. Smoot-Hawey was a huge mistake. But a that time we had a trade surplus and more production than we could possible consume according to the unemployment figures. Things have changed and other than oil we need not "trade" for anything at all. The objective is to dramatically reduce unemployment and pockets of poverty. Each nation should be doing that.

And BTW, the Sandwich Man is correct: If we are producing more than we need thus NEEDING to export, then we should stop producing so much by cutting the hours of work. I have no desire to work 100 hrs a week like the Chinese just so we can have a "flat earth".

Richard H. Serlin said...

An extremely serious problem with any attempt at temporary protectionism is that it can politically be very hard to get rid of later. It may easily do tremendous harm over the long run.

Richard H. Serlin said...

It also gives legitimacy to the public that protectionism is good overall, when this is immensely untrue. It is extremely harmful overall over the long run. You play a very dangerous game when you attempt temporary protectionism.

Barkley Rosser said...

save the rustbelt,

I know you are an old fan of protectionism, but do keep in mind that the US exports lots of manufactured goods, including even some autos and steel out of your precious rust belt. If exports go down, so will those, and if the whole economy is going down, that stuff will not get bought, with the decline of consumption of it easily outweighing the increase in government purchases due to the obnoxious "buy American" proposals.

trucker,

Presumably how the US "comes out way ahead" is that our decline in exports might not be as big as our decline in imports, although if the upshot is not that the decline in imports triggers domestic production in competing industries, but is simply part of a general decline in purchases, which is what is going on, your argument is wrong.

Of course, it might be that we will be hurt less than others. Goody! How exciting! This is just a reminder of the fact that I fear you are ignoring, that trade is not a zero sum game. This is a story with everybody going downhill, and if we are going dowhill less rapidly than others (with them blaming us all the way), is this something to seek out?

TheTrucker said...

The reality of our current trade deficit should be obvious and I wonder why it is not. There are persons here that claim that floating exchange rates take care of the problem. The reality of the last 30 years simply slaps this "theory" in the face. It isn't like our trade deficit just happened last year or in the last 3 or 4 years. If the currencies were going to adjust they would have already done so. This "floating currency" dog does not hunt and even if it did it would not address the ever widening wealth disparity between US owners and producers.

We are currently taxing US producers to pay for a huge military that serves as the world policeman. I would like to cut that cost to one fifth of what it is and then we might be able to do the "free trade" waltz. It is IP rights that make corporate profits possible. Those profits stem from the global enforcement of the rights. The owners of those rights are ripping off the producers of the actual goods because they do not pay sufficient taxes. In my opinion the owners of the rights should have to pay for the IP rights enforcement no matter where they put their home office and no matter where they locate their factory. If we want an America with a prosperous middle class we should collect those taxes as import tariffs and corporate income taxes.

The neoconomists tell us that if we increase the corporate income tax the corporations will move their headquarters offshore (the manufacturing facilities and the taxes that will go with those wages have already been moved). The only way to collect the fees for support of the worldwide enforcer of IP rights is with an import duty.

Lets have a trade war. The middle class would like some prosperity back, thank you.

ao said...

Braden,

I think you're confusing two arguments. One is the argument that we should increase trade barriers so that the affects of fiscal stimulus stay within the country. The other is that unilateral free trade is a good policy overall. I commented about the former here (although you're other argument is mistaken as well).

The idea that protectionism would be optimal if other countries were going to freeload would be wrong even if it were true that other countries were going to freeload. But even if you disagree with that statement, you have to recognize that the majority of developed nations are not going to freeload. Look at this map of the stimulus plans from the Economist:

http://www.economist.com/finance/displaystory.cfm?story_id=13035552

Japan, China, India, Russia, Britian, Germany, France, Italy, Canada, and Brazil all have fiscal stimulus plans. And you want to start a trade war with all of them because of who? Luxemborg?

This argument needs to stop before politicians get the mistaken impression that thoughtful people are taking it seriously.

wjd123 said...

Here is the protectionism Dani Rodrik worries about. I don't remember where I found it. But his worry makes an excellent case for tariffs in order to keep Obama's stimulus stimulating.


"It is pretty easy to increase the multiplier; just raise import tariffs by enough so that the marginal propensity to import out of income is reduced substantially (to zero if you want the multiplier to go all the way to 2.8). Yes, yes, import protection is inefficient and not a very neighborly thing to do--but should we really care if the alternative is significantly lower growth and higher unemployment? More to the point, will Obama and his advisers care? Being the open economy that it is, I fear that the U.S. will have to confront this dilemma sooner or later. In an environment where the dollar has already appreciated against the Euro and even more significantly against emerging market currencies, fiscal stimulus here will produce an even larger current account deficit. If American consumers decide to spend 40 cents of a dollar of additional income on cheap imports from China and other foreign countries, the multiplier will be a mere 1.3. How long will it take before politicians of all stripes cry foul over the leakage through the trade account and the "gift to foreigners" that this represents? And they will have Keynesian logic on their side."--Dani Rodrik

Barkley Rosser said...

trucker,

Having a trade deficit means that one is consuming all sorts of cheap stuff without having to pay for it, and we as Americans have been doing this big time for some time. Cutting it back means a decline in the standard of living for us, although in fact I agree that it must occur at some point one way or another. However, a rise in our savings rate would be the less damaging way to go than a trade war.

Again (and again and again), the last time we had a trade war was the 1930s, set off in the name of saving US jobs, and if you think that the US middle class did not suffer, well, I would hope that you are not that ignorant.

wjd123,

Dani Rodrik is a smart guy, but he rather ignores how "not very neighborly" most of the world already thinks we are. I see him completely avoiding any possibility of a trade war or retaliation. I think that this is a big mistake. I may be wrong, but then the downside if I am right is pretty godawful, even if a lot of people reading this refuse to face it.

Barkley Rosser said...

trucker,

A bit more that is rather important. You, along with others seem to imply that there is some relationship between running trade deficits and unemployment. However, the US has run chronic trade deficits for a good two decades, indeed longer. In the late 1990s the US was running substantially lower unemployment rates than many of its trading partners, especially in Western Europe, but the rade deficits kept on. Indeed, it is well known that a booming economy, unless the boom is driven by exports, will tend to see a move towards trade deficits. Imports tend to rise as the economy booms, so that ironically the economy that is doing better can end up with the larger trade deficits.

wjd123 said...

Barkley,

I don't want to leave you with the idea that Dani is advocating tariffs. He isn't. He is worried about their logic.

Martin Wolf,

Has recommended that we negotiate with China on it's currency manipulations. That, Obama tell them that we are serious "this time." He reminds us that even the United States can't go on running deficits that amount to 10% of it's GDP forever.

I rather like this recommendation by Thomas Palley. He is not so patient or so worried. Notice when it was written.


Thomas Palley
guardian.co.uk, Monday September 3 2007 22.00 BST
Article history

"The US Congress is currently contemplating critical legislation aimed at remedying the huge US-China trade deficit. China and businesses that benefit from Chinese imports oppose this legislation, and to discourage action China has hinted at retaliation - including possibly selling its US treasury bond holdings. That threat has prompted some to argue against legislative action on grounds that risks of a trade war are too large and costly. Such thinking is mistaken. The reality is China's threats are empty, whereas its currency manipulation is wreaking significant, real damage on the US economy.

"The Ryan-Hunter bill (HR 1498), now before the Congress, proposes treating currency manipulation as a form of illegal subsidy that would be subject to countervailing duties. In this fashion, Ryan-Hunter aims to offset China's undervalued currency and circumvent China's refusal to meaningfully revalue its exchange rate.

"There is widespread agreement that China's currency is under-valued and harming the US economy. This harm works through the trade deficit and imports that displace spending on domestically produced goods, thereby injuring manufacturers. Additionally, the undervalued currency displaces investment by encouraging business to invest in China rather than the US. The challenge for the US is how to respond in light of China's exchange-rate intransigence.

"Through its persistent trade surpluses China has accumulated over $400bn of treasury securities and it is now the second-largest foreign holder (after Japan) of government bonds. The fear is that China may retaliate against the US by selling bonds, causing the price of treasuries to fall and interest rates to rise. That in turn could trigger financial disruption, which in conjunction with higher rates could topple the economy into recession.

"Such reasoning is deeply flawed for several reasons. First, China has little incentive to engage in such tactics. If it starts selling bonds that will drive prices down, causing large capital losses on its holdings. More importantly, China has no interest in playing Russian roulette with the US economy as that threatens its own economy. The reason China refuses to revalue its exchange rate is because it wants to retain a competitive advantage enabling it to sell in US markets. Causing a US recession would destroy the very market in which it wants to sell. Worse than that, a US recession could trigger a global recession, thereby undermining markets in Europe and elsewhere that China also relies on.

"Second, the Federal Reserve can always intervene to mitigate the effect of any Chinese selling. Thus, were China to irrationally start selling, the Fed could step in and buy those bonds in so-called "sterilising operations". China would then be left holding lower-yielding bank deposits supplied by the Fed, and the Fed would hold the bonds sold by China. This would prevent interest rates from spiking and US taxpayers would actually benefit by saving the interest that would have been paid to China.

"Thereafter, China could decide to sell its bank deposits and buy foreign currency. If it were to buy renminbi and repatriate its dollar holdings, that would cause China's exchange rate to rise, which is exactly what US policymakers desire. Alternatively, China could buy yen and euros, which would cause the dollar to depreciate against these currencies. That too would benefit the US, especially if the yen were to appreciate, as this would make US producers more competitive versus European and Japanese companies.

"Appreciation of the euro and the yen would then shift America's exchange rate dispute with China to Europe and Japan. This would expose China to risk of retaliatory action from these countries, which are much more administratively aggressive in protecting their markets than is the US As a result, China could find itself at loggerheads with all its major customers (the US, Japan, and the EU), suggesting it will not go this route.

"Meanwhile, passage of Ryan-Hunter would enable US manufacturers to seek countervailing duties offsetting the subsidy implicit in China's currency manipulation. That would raise Chinese product prices in the US and reduce Chinese imports, yet the benefit of higher prices would go to the US government rather than Chinese manufacturers. That again makes no sense for China, suggesting that Chinese policymakers would prefer exchange rate revaluation to tariffs. That way China at least gets the benefit of higher prices.

"In sum, the US and China are currently engaged in a policy struggle that resembles the game of "chicken". Policy analysis can help disentangle the likely outcome of such a game by examining the credibility of each country's postures. Such analysis shows China's threats are empty. China relies on export-led growth to provide demand for its products and attract foreign direct investment. That means it cannot afford to destabilise the US economy or the global economy. And if it irrationally tries to do so, the Federal Reserve has the means to neutralise its actions."

Oh ome more thing. Tim Duy reminds us that we don't have much excess capacity when it comes to exporting tradable goods. It's China that has the excess capacity. (That's where we sent our capacity so we could concentrate on what we do best--things like financial services.)

Wouldn't that mean that even if we got China to appreciate the yuan it wouldn't do us much good. So why should we hurt China if no matter what we do China will get the benefit of our stimulus package--especially any tax rebates that are inserted. My answer would be that for years economist have been telling us that when it comes to our record trade deficits we can't go on this way forever. I don't want to go on this way any longer.

I guess I should add one more thing. I hope you are sitting down. I think Smoot-Hawley may well be a urban myth. It only raised our tariffs by 2%, no where near the historical high before that time. They are just something defenders of free trade like to roll out when threatened. Remember during the NAFTA debate between Al Gore and Ross Perot, Al Gore brought a picture of Mr. Smooth and Mr. Hawley with him.

tapsearcher said...

First of all Free Trade is not trade as historically practiced with the exception of the Roman Empire who outsourced and insourced workers while over expanding their empire.
Free Trade about moving production from place to place for the sake of cheaper labor.
The Smooth-Hawley act did not play a part in any of this.
Protectionism may have been in the minds of many people , but it did not exists in any external form. The Great Depression was about a money crisis. No one in the world had money to trade much of anything. Pres Roosevelt finally said he was not going to let the lack of dollars stop him and launched the Lend Lease Act and ramped up the U.S. economy this way by supplying the allies with goods and food without worrying about payment.
(The Smooth-Hawley act was passed in 1930 after the stock market crashedd. Pres. Roosevelt was elected in 1932. The trade laws were changed in 1934 allowing Pres. Roosevelt the power to lower or raise tariffs. Then there were 16 more different trade acts passed in the next 7 years. Nothing worked due to the money crisis. Protectionism and tariffs were mute issues. See Lend Lease was real free trade and not chop liver as in the globalist world at http://ezinearticles.com/?expert=Ray_Tapajna and http://tapsearch.com/flatworld

dedicated hosting said...

Unemployment rate was higher than 5% and probably reached 9 or 10% in the 1970s but the trade deficit as a proportion of the US GDP was high as well and probably equivalent to the number you have quoted for 2006.
I am not too sure that there is a statistical correlation between unemployment rate and trade deficit. Unemployment rate is more likely a holistic effect of national and international trade, national and international consumer spending and government spending.