US trade follies

FT columnist Martin Wolf worries that “US policymakers talk nonsense” and, for this reason, “could demolish the open trading system”.

The words of Wilbur Ross, US commerce secretary, … show one can be a billionaire and yet not understand how the economy works, just as one can be an athlete and not understand physiology.

…. Mr Ross told the Financial Times that “we are the least protectionist of the major areas. We are far less protectionist than Europe. We are far less protectionist than Japan. We are far less protectionist than China.”

He added: “We also have trade deficits with all three of those places. So they talk free trade. But in fact what they practice is protectionism. And every time we do anything to defend ourselves, even against the puny obligations that they have, they call that protectionism. It’s rubbish.”

It is what Mr Ross says that is rubbish. A trade deficit is not proof that a country is open to trade. It is proof that it is spending more than its income or investing more than it saves. This is not just a theoretical point. Solid evidence supports it. ….

Just as theory predicts, no significant relationship exists between trade freedom and deficits. To the extent there is one, it is in the opposite direction: there is a weak tendency for liberal traders to run larger surpluses. [See the three charts below.]

Martin Wolf, “Dealing with America’s trade follies“, Financial Times, 19 April 2017 (gated paywall).

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