Misunderstanding Trade
Andrew Fisher
Trump’s trade tirades are being vigorously disputed by liberal economists the world over, although the riposte is usually in defence of free trade and existing trade deals. However, many of these same economists have promulgated the underlying idea that U.S. trade deficits are the result of some sort of disadvantage or decline.
For instance, as I discussed in 2009, 2010, 2011 and 2012, many prominent economists such as Paul Krugman argued then (and many still do now) that China’s undervalued currency gave it an unfair advantage, causing deficits and even financial bubbles in the U.S. Many economists on the left have taken a similar line of argument. For instance, Yanis Varoufakis argues that U.S. trade deficits have planted the seeds for the downfall of the U.S. ‘Minotaur’ because it has made the country increasingly dependent on the willingness of other countries to finance these deficits.
Beyond methodological nationalism
The problem with this reasoning is that international trade, income and financial data mostly represent the trade, income and asset movements made by corporations
The country-based framing of the international accounts serves to obscure the very resilient and virulent foundations of U.S. power, based in the private corporate sector. Corporate ownership and/or control of trade, income and financial flows have become increasingly internationalised, even while remaining predominantly centred in the North and with a strong allegiance to maintaining U.S. dominance. In this sense, as argued by Jan Kregel already a decade ago, the U.S. shift to systemic trade deficits from the late 1970s onwards is best understood as a reflection of this internationalisation of U.S.-centred corporations as well as the increased profitability of these U.S. corporations operating in the international economy.
A simple stylised example is the iPhone. When Apple sends a production order to a subcontractor, this is not recorded as a service export from the U.S. However, the return export of the iPhone is reported as a goods export from China, even though the export is contracted by Apple, a U.S. company. The iPhone is then sold in the U.S. at many times its exported value, and the vast majority of the value of the final sale is accrued in the U.S. The U.S. has a merchandise trade deficit in this production and distribution network, even though this deficit is associated with the immense value-added accrued in the U.S. and the profitability of Apple. The same applies when Walmart exports from itself in China to itself in the U.S.
The idea that China’s surpluses and foreign exchange reserves constitute increasing power is similarly based on this flawed understanding of international accounts.
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