Despite the huge reception given to Thomas L. Friedman’s The World is Flat, published in 2006, our thinking about trade balances and their measurement remains over 500 years old: globalization has left trade balances behind! Mercantilism ruled from 1500 to about 1750, yet the framework it generated – “imports are bad, exports are good” – to account for and explain trade balances persists today.

The result is that this outdated and erroneous framework threatens the global operations of U.S. multinational corporations, and therefore, the:

• $23 million jobs they create in America;
• $341 billion worth of investments in America; and
• 25% or $3 trillion of America’s GDP they create.

How the “imports kill jobs” myth serves politicians

Politicians want to attain public office and stay in power as long as they can. For that, they need votes. If unemployment among the constituents rises, the incumbents’ votes are threatened. In such a situation, the easy reaction of both politicians and their voters is to blame so-called outside forces for fewer jobs.

Of course, there could be several real reasons for the rise in joblessness. These range from bad education policies that do not create employable (i.e. qualified) workers in sufficient numbers, to burdensome taxation, to lack of policy perseverance and poor corporate strategy. One way to avoid the inconvenient truth and deflect the criticism is to put the blame on “unfair” imports for killing domestic jobs.

What would be the result of carrying the logic of “killer imports” to its absurd conclusion? All imports to the U.S. would have to be banned.

This would also affect U.S. multinational corporations that have proliferated abroad and import their foreign-made products back into the U.S. market.

However, unlikely as such a prospect might be in the real globalized world, let us visualize the effects of a hypothetical ban on imports by the U.S. For starters, most of those imports would have to be substituted by local production, the cost of which would be much higher. This would raise the inflation and in turn, interest rates.

Higher interest rates result in reduced investment. The growth of manufacturing slows; fewer new jobs are created and more jobs are lost. A rise in the cost of capital sinks the housing market as well as adversely affecting stocks, bonds and debt markets, which would be focused on diminishing returns on investment.

The bottom line is – imports create jobs

In fact, imports allow U.S. companies to make more of what they are good at, thus creating jobs in America: supply creates demand. That is why, when imports rise, so does employment. We have developed “The Economic Clock” for many of the world’s economies. Whenever the “economic time” is good in America, there is an excess demand for goods. So, of course imports rise, as does the number of jobs.

How, then, can some U.S. politicians claim that imports kill jobs when the facts support exactly the opposite view?

Another question worth asking is: When America employs fewer people in manufacturing, how can the trade surplus rise if fewer people are manufacturing goods? The share of America’s manufacturing employment in total employment shrank by two thirds – from 28% in 1960 to 8% in 2016.

As fewer Americans are employed on the manufacturing assembly lines, more goods are imported, and that allows American companies to make more of what they are good at – and in this age, these are services. Over the past several decades there has been a persistent rise in the well-paying service-sector jobs for Americans; in the 1960s one in two Americans worked in the service sector; by now two in three hold service jobs. In the corresponding period, the country’s net balance in services trade has turned into a surplus.

According to the office of the U.S. Trade Representative, the services economy generates the largest services trade in the world, with exports of $606 billion dollars in 2011 and a trade surplus of $179 billion. In Canada, commercial services have now run a surplus for 13 years, all the way back to 2003 and throughout the Great Recession, according to Global Affairs Canada.

To sum up, the idea that imports kill jobs is fallacious for a number of reasons. The fact is that, thanks to the growth in the services sector, the U.S. export surplus in services has risen significantly.

Protectionism defeats everyone

While the immediate aim of this content is to reach decision-makers particularly in Washington and China, the broader objective is to move the thinking away from national or nation-state trade balances and towards multinational trade balances. This needs to be done to avert protectionism based on wrong-headed mercantilism.

Protectionism defeats everyone and the resulting animosity leads to unemployment, followed by social unrest and even wars.

It is always easier to blame the foreigner than to work on one’s own backyard. Most of all, this content is meant to stir some debate in order to solve the problem of protecting American workers from offshoring and, as Prof. Alan Blinder stated in one of his essays: “My main purpose is to get as many smart people as possible thinking creatively about the problem.”

The post Imports do not kill jobs – protectionism does appeared first on Trade Ready.

A myth is a “widely held but false belief” according to the Oxford English Dictionary. Politicians and pundits everywhere seek to sway opinion by exploiting the large following that fictitious yet popular ideas command. Small wonder then that such myths, based on the mindset of the 1500s, are still flourishing.

To bring us into the 21st century, it is worth questioning these myths in order to show how irrelevant they are in today’s era of deepening globalization.

The exchange rate myth

A ploy in the criticism of domestic policies that have fostered unemployment through trade, is to blame the exchange rates of a country that is running a large surplus with America. The simplistic logic of this complaint is that if only that country’s exchange rates were stronger, America would have no deficit.

It is all well to hector other nations to up their exchange rates, but it is far from easy to have it implemented, especially if the other country has enough economic and political clout in the world. In turn, leaders of that country, as well as some voices in the U.S., would demand that the greenback be devalued even more.

What would happen if the U.S. dollar were to be devalued progressively? Among other things, the U.S. would import higher inflation, interest rates would rise, and the value of U.S. assets held by foreigners would shrink. Foreign central banks and overseas investors would wonder why they were holding depreciating assets in U.S. dollars. All of this would lead to a huge sell-off of U.S. assets, including U.S. stocks and bonds.

Decline in investment affects the growth of business and costs jobs in America.

Exchange rate fact vs fiction

Removing the myths and probable scenarios, what are the remaining facts about exchange rates and trade surpluses? In fact, over the past three decades, Germany and Japan have had rising exchange rates and rising trade surpluses, while Britain and America have had falling exchange rates and rising trade deficits.

From 1971 (when Bretton Woods was replaced by floating currencies) to 2007, the Deutschmark rose 2.5 times in its annual average value against the dollar. In that same time Germany’s global trade surplus rocketed 25 times, to euro 162 billion.

Japan reveals a similar story. From 1971 to 2007, the yen rose 2.6 times against the greenback, and Japan’s global trade surplus shot up over seven times, to nearly 11 trillion yen.

How, then, can some U.S. politicians claim that a stronger exchange rate kills exports, when exactly the opposite is true in two of the three members of the G-3?

Meanwhile, the story is radically different for the Anglo-Saxon economies. From 1971 – 2007, the British pound fell by about 20% against the U.S. dollar; however, this masks the fact that it had halved in value by 1985. Yet the UK’s trade deficit rocketed 463 times during the same period.

Putting an end to the blame game

And finally to the core of the argument of many U.S. politicians seeking election or re-election; that others’ “undervalued” exchange rates are to blame for America’s ballooning trade deficit.

In fact, from 1971 – 2007, the U.S. dollar fell by one third in terms of its trade-weighted exchange rate with major trading partners, but America’s trade deficit ballooned nearly 360 times, to over $800 billion. How, then, can some U.S. politicians still claim that a weaker exchange rate propels exports, thus creating a trade surplus?

To sum up, the myth is that exchange rates or other currencies cause American trade deficits.

The fact is that exchange rates matter in the aggregate only at the margin. We have just demonstrated that countries do not have trade surpluses or deficits because of the exchange rate.

Look at Germany’s rising currency and its rising surplus – and at America’s recent falling exchange rate and its rising deficit. Of course, individual companies have headaches hedging against their specific currency risks.

What really drives trade is the comparative advantage of an economy, not exchange rates.

The post Another trade myth debunked – exchange rates do not drive trade appeared first on Trade Ready.