# Trade Flows and Trade Balances

An episode of [Paul Krugman Podcast](https://invisiblenetwork.ai/podcast/1877144831), 8 Feb 2025, 48 min.

Audio: https://api.substack.com/feed/podcast/156550392/c3d33803eb49171f2fc2eb6ec7159888.mp3

Last week was supposed to be all about a hugely destructive North American trade war. Instead, that’s been put on hold, while other nightmares have come to the fore. But I’ve had numerous request from readers for a sort of primer on international trade flows, to help them parse the various claims about deficits and all that. So what follows are a set of slides. To be honest, I didn’t have time to write this up fully, so I’ve done an audio narration instead. And I’m making it paid, mainly because those who have taken out paid subscriptions (thank you!) should get something in return. Get full access to Paul Krugman at paulkrugman.substack.com/subscribe

## Transcript

[0:02] SPEAKER_00: Hi, everybody.
[0:02] SPEAKER_00: Paul Krugman here.
[0:04] SPEAKER_00: I'm going to do something I've done once before,
[0:09] SPEAKER_00: but a little different in some details,
[0:14] SPEAKER_00: which is to give you a narrated slideshow.
[0:19] SPEAKER_00: It's wonky stuff.
[0:21] It's for paid subscribers only because I think that you should
[0:25] get something for
[0:26] SPEAKER_00: your subscription.
[0:28] SPEAKER_00: It's not...
[0:30] SPEAKER_00: tremendously topical, although it's certainly related to current events.
[0:36] SPEAKER_00: I hope that people find it interesting.
[0:39] So without further ado,
[0:41] let me launch in on what it is I'm going to be trying to deal
[0:47] with here.
[0:48] I've had a number of requests from people for a little bit of a
[0:52] kind of primer on
[0:54] SPEAKER_00: international trade.
[0:56] SPEAKER_00: not obviously the kind of full exposition you get in a textbook,
[1:02] maybe something a little bit more like the masterclass I once
[1:06] did on economics.
[1:08] SPEAKER_00: But basically where we are is that
[1:12] SPEAKER_00: There's a lot of talk about trade.
[1:14] SPEAKER_00: We have a president who,
[1:15] SPEAKER_00: among other obsessions,
[1:17] is really obsessed with the fact that we run trade deficits
[1:22] with some particular countries.
[1:25] SPEAKER_00: And we had, well...
[1:28] SPEAKER_00: Do we have a trade war?
[1:29] SPEAKER_00: A few days before I recorded this,
[1:32] it seemed that we were all set to have a really destructive
[1:35] trade war with Canada
[1:37] SPEAKER_00: and Mexico.
[1:37] That has been temporarily put on ice,
[1:41] and I could talk about what happened there.
[1:46] SPEAKER_00: Basically, it looks like
[1:49] SPEAKER_00: Trump folded, but that's really not the topic today.
[1:53] This is more kind of background for how do we think about
[1:57] international trade?
[1:59] SPEAKER_00: How do we think about international trade deficits?
[2:03] When is a substantial imbalance in trade between the United
[2:08] States and some other
[2:09] SPEAKER_00: country a reason to be concerned?
[2:11] SPEAKER_00: It won't surprise you to learn that most of what we get from
[2:16] SPEAKER_00: from Donald Trump is nonsense.
[2:19] SPEAKER_00: It doesn't mean that everything is always okay.
[2:22] It doesn't mean that you should always accept whatever the
[2:25] world trading system
[2:27] SPEAKER_00: gives us as being a good outcome.
[2:30] Much of the time you should,
[2:31] but in any case,
[2:32] let's try to talk through these issues.
[2:35] SPEAKER_00: And the way I'm going to do this,
[2:37] SPEAKER_00: and it's a little,
[2:38] SPEAKER_00: I'm sure there would be a fancier way to do it with a narrated
[2:43] SPEAKER_00: whole setup with the slides moving automatically as I speak,
[2:49] but I'm actually just going to ask people to scroll down in the
[2:54] document that
[2:55] should be underneath this audio and look at the slides as I
[3:00] refer to them.
[3:02] SPEAKER_00: So let's talk about, first of all, international trade.
[3:06] And the big question I guess to start with is,
[3:10] what's all this international trade about?
[3:13] SPEAKER_00: And that obviously would take a few books to describe the whole thing,
[3:20] SPEAKER_00: but the basics are really not very complicated.
[3:24] SPEAKER_00: We have international trade because countries produce different things.
[3:29] And each country wants at least some of what other countries
[3:33] are producing that it
[3:35] SPEAKER_00: doesn't or doesn't in sufficient quantity.
[3:38] SPEAKER_00: And there are two basic reasons why countries produce different things,
[3:43] SPEAKER_00: which is my first slide here.
[3:46] SPEAKER_00: One of them is that countries are different.
[3:49] SPEAKER_00: They're different in their capacities.
[3:51] SPEAKER_00: They're different in their resources, whatever.
[3:55] SPEAKER_00: There are multiple ways in which they can be different,
[3:58] SPEAKER_00: and they trade in order to take advantage of their differences.
[4:03] SPEAKER_00: That's the theory of comparative advantage,
[4:05] SPEAKER_00: although there's obviously much more to it than that.
[4:09] The second is that countries trade because there are inherent
[4:13] advantages in not
[4:16] SPEAKER_00: producing everything for yourself.
[4:18] There are advantages to specializing on a more limited set of
[4:24] goods and letting
[4:25] SPEAKER_00: other countries produce the things that you don't.
[4:29] SPEAKER_00: This is a lot like why do people do different things?
[4:33] SPEAKER_00: Why do we pursue different careers?
[4:36] SPEAKER_00: Why do we
[4:37] sell different things to the extent that we sell our labor on
[4:40] the market.
[4:42] SPEAKER_00: If you have two promising young people,
[4:48] SPEAKER_00: one of them may become a surgeon and the other may become a lawyer.
[4:52] SPEAKER_00: Well, why do they do that?
[4:53] SPEAKER_00: Well, one answer, why do they do different things?
[4:56] One answer may be that one of them,
[5:00] the surgeon just doesn't like to argue with people.
[5:05] SPEAKER_00: so she doesn't become a lawyer.
[5:07] SPEAKER_00: And the lawyer might be someone who can't stand the sight of blood,
[5:11] SPEAKER_00: so he doesn't become a surgeon,
[5:12] SPEAKER_00: he becomes a lawyer.
[5:14] SPEAKER_00: Well, that's differences between people.
[5:17] SPEAKER_00: The other reason they might be doing different things is that
[5:23] It takes a lot of time to learn to become either a surgeon or a
[5:27] good lawyer.
[5:28] SPEAKER_00: And there really isn't enough time in anybody's life to do both of those,
[5:32] SPEAKER_00: or at least most of us.
[5:33] SPEAKER_00: So even if the two people had identical talents,
[5:38] SPEAKER_00: identical tastes,
[5:40] SPEAKER_00: they would probably end up specializing in doing different things.
[5:45] Now,
[5:46] if we're talking about countries,
[5:48] these things are a little bit harder to discuss.
[5:51] SPEAKER_00: Up until about 1980,
[5:53] almost all of what economists wrote about international trade
[5:59] focused on reason one,
[6:01] SPEAKER_00: on differences between countries,
[6:03] SPEAKER_00: and really neglected reason two.
[6:05] SPEAKER_00: There were reasons for that which had to do with the fact that
[6:10] SPEAKER_00: unless you think about it exactly the right way,
[6:13] talking about the role of increasing returns is tricky and
[6:18] awkward and just messy.
[6:21] SPEAKER_00: And so it seemed to be until circa 1980.
[6:25] SPEAKER_00: That, as some of you may know, is where I came in.
[6:28] SPEAKER_00: Not just me,
[6:29] SPEAKER_00: but a bunch of people,
[6:30] SPEAKER_00: but probably I was the one who deservedly or not got,
[6:33] SPEAKER_00: I guess,
[6:34] SPEAKER_00: the biggest rinse from it.
[6:36] SPEAKER_00: The so-called new trade theory,
[6:37] SPEAKER_00: or as people sometimes call it,
[6:38] SPEAKER_00: the old new trade theory,
[6:40] SPEAKER_00: which mostly involved...
[6:43] SPEAKER_00: thinking about things, just looking at it from a different angle.
[6:48] SPEAKER_00: And I probably shouldn't go on into what that angle involved,
[6:54] SPEAKER_00: but just to say that it turns out that what looked like a really messy,
[6:59] SPEAKER_00: intractable,
[7:00] SPEAKER_00: that's kind of a word that economists will use,
[7:02] an intractable issue was actually quite neat and illuminating
[7:08] if you just looked at
[7:09] SPEAKER_00: it from a particular perspective.
[7:12] SPEAKER_00: And
[7:13] SPEAKER_00: The rest, well, that was my career as an academic anyway.
[7:18] SPEAKER_00: And enough said.
[7:19] SPEAKER_00: Both of these things are operative in the real world.
[7:23] SPEAKER_00: The reason that we get oil from places that have oil fields,
[7:30] SPEAKER_00: actually we don't so much because we now have our own shale oil,
[7:33] but the reason that wheat comes from Canada and coffee from
[7:37] Brazil is that the
[7:38] SPEAKER_00: climates are different.
[7:40] The reason that the Canadian piece of the North American auto
[7:46] industry doesn't
[7:47] produce the full range of products is largely that Canadian
[7:52] market is not big
[7:53] SPEAKER_00: enough to have efficient scale production of the full range of products.
[7:58] SPEAKER_00: Enough said.
[8:00] SPEAKER_00: Countries do produce different things.
[8:04] Simple exposition of international trade theory often leads you
[8:10] to believe that,
[8:12] SPEAKER_00: well,
[8:13] everybody should be at least selling and buying about the same
[8:17] amount in terms of dollars,
[8:18] SPEAKER_00: that trade should be balanced.
[8:21] SPEAKER_00: But of course, trade is not balanced.
[8:23] Each individual country at any point in time is quite likely to
[8:27] be either selling
[8:28] SPEAKER_00: more than it buys or buying more than it sells.
[8:32] um now that's true of goods and services if we look at
[8:37] everything including sales
[8:39] of assets and liabilities then actually trade is balanced it's
[8:44] kind of the
[8:44] arithmetic says it has to be balanced every every sale is also
[8:48] a purchase uh the
[8:50] SPEAKER_00: balance of payments as a whole always balances and we make a
[8:55] SPEAKER_00: we can divide things up quite a lot,
[8:57] but the basic division is between sales of assets and sales of
[9:03] goods and services.
[9:06] The current account balance is the net of what you sell in
[9:10] terms of goods and
[9:11] services and also includes investment income because the income
[9:16] on your overseas
[9:17] SPEAKER_00: investments is like you were selling,
[9:19] SPEAKER_00: you're basically renting somebody else the use of your capital.
[9:24] So we have a current account balance and we have what
[9:27] economists typically call the
[9:29] SPEAKER_00: capital account balance.
[9:30] SPEAKER_00: But for reasons I don't fully understand, official U.S.
[9:33] statistics use that term for something much narrower and call
[9:37] it the balance on
[9:38] SPEAKER_00: financial account,
[9:39] which is sales of assets to foreigners minus purchases of
[9:45] assets from foreigners.
[9:49] Here,
[9:49] the second chart shows you those balances for the United States
[9:54] in 2023.
[9:56] SPEAKER_00: We had a deficit on current account.
[9:59] SPEAKER_00: We bought more from foreigners than we sold.
[10:02] SPEAKER_00: We had a surplus on financial accounts.
[10:04] SPEAKER_00: Foreigners invested more in America than we invested abroad.
[10:09] SPEAKER_00: Those two lines are...
[10:11] SPEAKER_00: In principle, have to be the same length.
[10:14] SPEAKER_00: They're equal.
[10:15] SPEAKER_00: But it's just the accounting says that they have to be equal.
[10:18] SPEAKER_00: In practice,
[10:19] they're not quite equal as measured because these are data that
[10:22] are collected independently.
[10:24] SPEAKER_00: And there's always some slippage.
[10:26] SPEAKER_00: There's always a statistical discrepancy.
[10:29] It's not a very large statistical discrepancy these days,
[10:33] which wasn't always the case.
[10:34] When I was getting started in this whole economics business,
[10:40] we had pretty big discrepancies.
[10:44] SPEAKER_00: We used to joke that the
[10:46] SPEAKER_00: The largest single U.S.
[10:48] SPEAKER_00: export was actually errors and omissions.
[10:50] SPEAKER_00: But maybe the data collection has gotten better.
[10:52] SPEAKER_00: I'm not entirely sure why.
[10:53] SPEAKER_00: But right now, basically, even even a measured numbers match.
[10:58] SPEAKER_00: And there's nothing inherently wrong with that.
[11:00] It makes sense for some countries to be net recipients of
[11:04] foreign investment.
[11:06] SPEAKER_00: And.
[11:07] SPEAKER_00: If they are, they're going to run a trade deficit.
[11:09] It makes sense for some countries to be investing some of their
[11:13] savings abroad,
[11:14] SPEAKER_00: in which case they're going to run a trade surplus.
[11:17] SPEAKER_00: That's just sort of, it needn't be a sign of a problem.
[11:23] SPEAKER_00: What drives these differences?
[11:27] SPEAKER_00: Well,
[11:28] SPEAKER_00: in the modern world,
[11:30] SPEAKER_00: most of the time,
[11:31] SPEAKER_00: it's the financial transactions that drive the trade deficit.
[11:37] you can tell stories in which a country for some reason is just
[11:41] unable to sell
[11:42] SPEAKER_00: enough to pay for its imports and is forced to borrow to pay for them.
[11:47] Scenarios like that used to happen a lot more in a world of
[11:53] fixed exchange rates
[11:54] SPEAKER_00: and capital controls and all of that.
[11:56] SPEAKER_00: But these days, in general,
[11:59] movements in trade balances are driven by changes in capital flows,
[12:06] changes in investment.
[12:08] And I'd like to give you a real-world example of some really
[12:10] drastic movements
[12:11] SPEAKER_00: which may,
[12:13] SPEAKER_00: among other things,
[12:13] help cure the perception that a country that runs a trade
[12:19] surplus is winning and a
[12:20] SPEAKER_00: country that runs a trade deficit is losing.
[12:23] SPEAKER_00: So here is the case of Spain, my next slide.
[12:27] SPEAKER_00: Spain
[12:30] current account uh so it includes investment income but it's
[12:33] it's basically the
[12:34] trade balance as a percentage of gdp spain uh had a roughly
[12:40] balanced current
[12:42] account in the late 1990s which then moved into an enormous
[12:48] enormous deficit it's
[12:50] SPEAKER_00: uh uh
[12:53] really much larger relative to GDP than anything we've seen in
[12:56] the United States,
[12:58] SPEAKER_00: peaking just about on the eve of the global financial crisis,
[13:03] SPEAKER_00: then quickly reversing and moving into a surplus by the mid-2010s.
[13:13] SPEAKER_00: What was all of that about?
[13:15] SPEAKER_00: What drove that?
[13:17] SPEAKER_00: Well, the answer is that
[13:21] SPEAKER_00: This really has a lot to do with the euro.
[13:25] SPEAKER_00: When Spain joined the euro, which was 1999, the euro came into existence.
[13:32] SPEAKER_00: Euro notes came a little bit later,
[13:36] SPEAKER_00: but the relative values of the currencies were permanently fixed,
[13:41] SPEAKER_00: and effectively the euro began in 1999.
[13:45] there was a widespread belief that this ended cross-country
[13:50] financial risks within Europe.
[13:53] SPEAKER_00: In retrospect,
[13:53] SPEAKER_00: that looks silly,
[13:55] but there was a period of time when everybody thought that any
[14:00] euro-denominated
[14:01] SPEAKER_00: bond was as safe as any other euro-denominated bond,
[14:05] SPEAKER_00: that Spain was as safe an investment as Germany.
[14:08] SPEAKER_00: And you can see that in the next chart, which is a Fred chart.
[14:15] Side note,
[14:16] Fred has changed their presentation in ways that make their
[14:19] graphs less usable.
[14:21] SPEAKER_00: And I'm trying to figure out how to change it back.
[14:24] And I'm going to correspond with them because I don't like the
[14:26] current format.
[14:27] SPEAKER_00: So the print is probably too small for some people to read.
[14:30] But this is the difference between interest rates on 10-year
[14:34] bonds in Spain and in Germany.
[14:37] SPEAKER_00: And as you can see,
[14:39] SPEAKER_00: early on,
[14:40] SPEAKER_00: as the euro was coming into existence,
[14:43] SPEAKER_00: that differential more or less disappeared.
[14:46] SPEAKER_00: Everybody decided that Spain was as safe as Germany,
[14:49] SPEAKER_00: which meant that investing in Spain,
[14:53] SPEAKER_00: borrowing in Spain became a lot cheaper.
[14:56] SPEAKER_00: Lots of money flowed into Spain.
[14:58] SPEAKER_00: A lot of it went into fueling a gigantic housing bubble,
[15:02] much bigger even than the housing bubble we had in the United
[15:05] States at roughly the
[15:06] SPEAKER_00: same time.
[15:08] SPEAKER_00: And then...
[15:10] SPEAKER_00: Well, for a while, Spain had huge inflows of capital.
[15:16] SPEAKER_00: A lot of that was actually German regional banks,
[15:19] SPEAKER_00: Landesbank and lending to Spanish Cajas,
[15:23] SPEAKER_00: more or less savings and loans,
[15:25] SPEAKER_00: which were then in turn financing home construction.
[15:28] SPEAKER_00: A lot of holiday homes.
[15:30] SPEAKER_00: Think of it kind of in many ways as being like Florida.
[15:34] SPEAKER_00: It was way out of hand.
[15:36] SPEAKER_00: It was a huge part of the economy.
[15:39] SPEAKER_00: How did that inflow of capital translate into a trade deficit?
[15:43] SPEAKER_00: Well,
[15:44] part of it was that the Spanish economy boomed and the booming
[15:48] economy pulled in a
[15:49] SPEAKER_00: lot of imports.
[15:51] SPEAKER_00: But also,
[15:52] SPEAKER_00: now,
[15:53] SPEAKER_00: if Spain had had its own currency,
[15:55] SPEAKER_00: that would have been a rise in the value of the currency,
[15:58] SPEAKER_00: which would have made Spanish goods less competitive.
[16:02] Spain didn't have its own currency,
[16:04] but they had a rise in the real exchange rate.
[16:09] SPEAKER_00: the ratio of Spanish prices to German prices in particular.
[16:15] SPEAKER_00: Basically,
[16:16] a highly inflationary economy in Spain meant that Spanish costs
[16:20] were running high,
[16:22] SPEAKER_00: rising relative to German costs,
[16:24] SPEAKER_00: and Spanish industry became highly uncompetitive.
[16:28] SPEAKER_00: Then the music stopped.
[16:30] SPEAKER_00: There was a global financial crisis which made people nervous about
[16:35] SPEAKER_00: Potential risks everywhere.
[16:36] SPEAKER_00: And then on top of that,
[16:38] a specifically euro crisis with with Greece getting into crisis
[16:43] and everybody
[16:44] SPEAKER_00: generalizing that to a lot of southern Europe and suddenly Spanish.
[16:50] SPEAKER_00: Spanish bonds sold at a big discount relative to German bonds.
[16:54] SPEAKER_00: Interest rates in Spain rose a lot relative to interest rates in Germany.
[16:59] SPEAKER_00: And the capital inflows just dried up.
[17:02] SPEAKER_00: That translated into a big...
[17:05] SPEAKER_00: reduction of and eventually elimination of the Spanish trade deficit,
[17:09] SPEAKER_00: initially through a severe recession,
[17:13] SPEAKER_00: which depressed demand for imports in Spain,
[17:15] SPEAKER_00: eventually over time through relative deflation.
[17:21] SPEAKER_00: Spanish prices rose much more slowly than prices in Northern Europe.
[17:27] SPEAKER_00: Spanish wages rose much less than wages in Northern Europe.
[17:33] SPEAKER_00: and Spanish industry became increasingly competitive,
[17:36] SPEAKER_00: particularly there was a boom in the auto sector eventually,
[17:40] SPEAKER_00: and Spain began to run trade surpluses.
[17:45] SPEAKER_00: Also,
[17:45] SPEAKER_00: although not really the subject of this,
[17:48] what was really quite remarkable was that they had this huge
[17:52] interest differential
[17:54] SPEAKER_00: that was supposedly showing that Spain was on the brink of insolvency
[18:00] SPEAKER_00: That then went away very,
[18:02] SPEAKER_00: very,
[18:02] SPEAKER_00: very quickly,
[18:03] SPEAKER_00: basically because Mario Draghi said three words,
[18:06] SPEAKER_00: whatever it takes,
[18:08] SPEAKER_00: we will do whatever it takes to prevent Spain from defaulting.
[18:11] And it turned out that a lot of the risk was really not
[18:15] fundamental doubts about
[18:16] SPEAKER_00: Spanish solvency,
[18:17] SPEAKER_00: but simply Spain appearing to be...
[18:21] SPEAKER_00: People were worried that they could literally run out of money,
[18:23] SPEAKER_00: that they could just have a liquidity crunch,
[18:26] SPEAKER_00: a cash crunch.
[18:27] SPEAKER_00: And as soon as the ECB,
[18:29] SPEAKER_00: European Central Bank,
[18:30] made it clear that they would supply cash in such a case and
[18:34] that Spain would not
[18:35] SPEAKER_00: literally run out of money,
[18:37] SPEAKER_00: much of the differential disappeared.
[18:40] SPEAKER_00: It's an amazing story, but a bit of a digression from where I'm going.
[18:45] So all of this is about why do countries produce different
[18:49] things and why do
[18:50] SPEAKER_00: countries sometimes run trade surpluses or trade deficits?
[18:54] SPEAKER_00: And this is, in many ways, that's the important thing.
[18:57] SPEAKER_00: One of the main lessons of all of this analysis is that
[19:03] SPEAKER_00: who exactly trades with whom,
[19:05] SPEAKER_00: and in particular who runs a surplus with whom,
[19:07] SPEAKER_00: is a lot less important than people tend to think it is.
[19:10] SPEAKER_00: But it is a world of many countries,
[19:12] SPEAKER_00: and it does matter,
[19:14] SPEAKER_00: or at least it's a subject of interest,
[19:17] SPEAKER_00: who sells to whom,
[19:18] SPEAKER_00: who buys what.
[19:21] SPEAKER_00: What's the pattern of trade flows among countries?
[19:26] SPEAKER_00: A few years back, a chapter of the IMF's World Economic Outlook,
[19:31] Which is a highly imperfect guide to what's going to actually
[19:35] happen the economic
[19:36] outlook but provides a lot of useful economic research a
[19:41] chapter was devoted to
[19:44] SPEAKER_00: bilateral trade flows and
[19:47] SPEAKER_00: That is flows between particular pairs of countries.
[19:51] And they produced a diagram showing the major world trade flows
[19:55] in 2015 with the
[19:58] SPEAKER_00: length of the arrows corresponding to the value of the trade.
[20:02] SPEAKER_00: And as you look at this slide,
[20:06] SPEAKER_00: you can clearly see,
[20:08] SPEAKER_00: well,
[20:08] SPEAKER_00: I don't think you can clearly see anything.
[20:10] SPEAKER_00: It's a neat picture,
[20:13] SPEAKER_00: gives you some sense of what's going on out there,
[20:16] but really not a very helpful way to do any kind of analytical
[20:24] thinking about
[20:25] SPEAKER_00: international trade.
[20:27] SPEAKER_00: So how do we think about who trades with whom,
[20:30] SPEAKER_00: how much,
[20:31] and then from there to what does it mean when countries run
[20:38] surpluses or deficits
[20:39] SPEAKER_00: with each other?
[20:41] SPEAKER_00: Okay.
[20:43] SPEAKER_00: Gravity.
[20:45] Always got to bring in Wile E.
[20:46] Coyote whenever possible into economics discussions.
[20:51] SPEAKER_00: And,
[20:51] SPEAKER_00: you know,
[20:52] SPEAKER_00: the cartoon theory of gravity,
[20:53] SPEAKER_00: which is that if you walk off the edge of a cliff,
[20:56] you don't start falling until you notice that you're standing
[21:01] on thin air and then
[21:02] SPEAKER_00: you plunge.
[21:03] SPEAKER_00: Anyway, there is a widespread phenomenon.
[21:07] SPEAKER_00: extremely useful,
[21:09] SPEAKER_00: extremely validated approach to international trade,
[21:13] SPEAKER_00: which is the gravity equation,
[21:15] which says roughly that trade between two countries is
[21:21] proportional to the product
[21:23] SPEAKER_00: of their GDPs.
[21:24] SPEAKER_00: So it's like gravity,
[21:26] which is the gravitational pull between the Earth and the Moon
[21:31] is proportional to
[21:34] SPEAKER_00: the mass of the Earth and also proportional to the mass of the Moon.
[21:39] So it's proportional to the product of those two masses,
[21:42] but falls off with distance.
[21:46] SPEAKER_00: In fact,
[21:49] you do pretty well at explaining the amount of trade between
[21:52] countries with
[21:56] multiplying the two countries' GDPs and then dividing by the
[21:59] mileage between them.
[22:02] SPEAKER_00: If you estimate it,
[22:03] you come out with parameters that are a bit different from one
[22:05] on all of these things,
[22:07] SPEAKER_00: but that's the basic principle.
[22:09] SPEAKER_00: You can see it graphically,
[22:11] and I just stole some slides from the world's leading textbook
[22:18] in international economics,
[22:21] SPEAKER_00: which is not the big book that
[22:25] SPEAKER_00: my wife and I write for principles,
[22:27] but the book that I wrote with Maury Ostfeld and as now
[22:31] co-authored by Mark Melitz.
[22:33] SPEAKER_00: And we do have a chapter on trade facts.
[22:38] These figures are for 2015,
[22:42] which is why the EU still includes the UK there.
[22:47] SPEAKER_00: But this shows, first of all, US trade with European countries.
[22:54] And the trade here is the sum of exports and imports,
[23:00] but it's not looking here.
[23:02] SPEAKER_00: It looks like the graphics editor made a bit of a mistake,
[23:05] SPEAKER_00: but that's supposed to be a 45 degree line,
[23:07] SPEAKER_00: which it isn't.
[23:08] SPEAKER_00: That's interesting.
[23:09] SPEAKER_00: All right, nevermind.
[23:11] SPEAKER_00: This is,
[23:13] SPEAKER_00: but if it had been done right,
[23:15] SPEAKER_00: my God,
[23:17] SPEAKER_00: you would see that for the most part,
[23:19] SPEAKER_00: the amount of trade that we do
[23:21] SPEAKER_00: with any European country.
[23:23] SPEAKER_00: They're all about the same distance from the United States.
[23:25] The amount of trade that we do with any European country is
[23:28] proportional to that
[23:30] SPEAKER_00: country's GDP,
[23:31] SPEAKER_00: with a few exceptions,
[23:33] SPEAKER_00: anomalies,
[23:34] SPEAKER_00: and the anomalies are themselves interesting.
[23:37] SPEAKER_00: The big anomalies
[23:40] SPEAKER_00: Denmark,
[23:40] SPEAKER_00: I'm not sure what's going on there,
[23:42] SPEAKER_00: but the big anomalies are the Netherlands and Belgium.
[23:46] SPEAKER_00: And I'll talk about the Netherlands in a moment there.
[23:48] SPEAKER_00: It's really nothing particularly disturbing going on there.
[23:57] Same figure,
[23:59] but this time we've added in,
[24:02] so the next slide,
[24:04] added in Canada and Mexico.
[24:07] SPEAKER_00: And although expressing their GDP as percentages of EU GDP,
[24:13] SPEAKER_00: but looking at their trade with the United States.
[24:16] SPEAKER_00: And as you can see, Canada and Mexico do vastly more trade.
[24:23] with the United States than you would expect given the size of
[24:29] their economies if
[24:30] SPEAKER_00: they were European countries.
[24:32] SPEAKER_00: And the reason is they're closer.
[24:35] SPEAKER_00: This is the role of distance in international trade.
[24:39] SPEAKER_00: Distance matters partly because
[24:42] SPEAKER_00: because of concrete actual costs of trade.
[24:46] SPEAKER_00: It does cost more to ship stuff at long distance.
[24:49] SPEAKER_00: It probably also involves more intangible factors.
[24:53] SPEAKER_00: At the modern world,
[24:55] we have these complex value chains where pieces of a product
[25:01] are done in many places.
[25:04] SPEAKER_00: Stuff goes back and forth.
[25:06] SPEAKER_00: There's a whole lot of complex interaction that goes on.
[25:12] SPEAKER_00: And that does require not just being able to communicate,
[25:18] SPEAKER_00: which we can do these days pretty easily,
[25:21] but sometimes somebody from the head office needs to go out
[25:25] there to the factory
[25:26] SPEAKER_00: and ask.
[25:29] uh in in germany or the factory in china and take a look at
[25:33] what's going on and
[25:34] figure out why you know first of all just have a meeting with
[25:37] this an in-face in
[25:39] person face-to-face meeting with the relevant people where they
[25:43] can talk about the
[25:44] production issues with the next uh the next version of their
[25:48] product or figure out
[25:50] what's going wrong and why are why are the parts coming out not
[25:53] quite up to
[25:55] up to specifications or whatever,
[25:57] it turns out that personal contact remains quite important.
[26:01] SPEAKER_00: Actually,
[26:01] we don't yet know how much the rise of remote communication
[26:05] will erode the
[26:07] SPEAKER_00: importance of distance and trade.
[26:10] SPEAKER_00: It's going to be one of those things to watch.
[26:12] SPEAKER_00: You can't see it in the data yet, but maybe.
[26:15] SPEAKER_00: Maybe it will take place over time or maybe not.
[26:18] The same factors that are leading a lot of companies to ask
[26:21] that workers return to
[26:23] the office at least a few days a week may also mean that being
[26:26] a short plane flight
[26:28] SPEAKER_00: away is still a kind of an important thing for international trade.
[26:35] SPEAKER_00: Okay, that is the total amount of trade.
[26:39] SPEAKER_00: What about trade balances?
[26:41] SPEAKER_00: Okay.
[26:44] So the first thing to say about trade imbalances is that
[26:48] countries as a whole don't
[26:50] SPEAKER_00: run balanced trade.
[26:52] SPEAKER_00: We don't expect them to.
[26:54] We expect some countries to be net importers of capital and
[26:58] hence to run trade deficits.
[27:00] We expect some countries to be net exporters of capital and
[27:04] hence run trade surpluses.
[27:08] SPEAKER_00: They can be importers or exporters of capital for good or bad reasons.
[27:13] I would say that for the most part,
[27:14] the United States is an importer of capital.
[27:17] SPEAKER_00: Capital flows into the United States for good reasons.
[27:21] SPEAKER_00: The United States is a technologically very successful country.
[27:26] SPEAKER_00: We're leading the pack in technology.
[27:29] SPEAKER_00: We're generating a lot of value.
[27:34] Our productivity is significantly higher than that of other
[27:37] advanced economies.
[27:39] SPEAKER_00: Our demography, at least for the moment, is a lot more favorable.
[27:43] SPEAKER_00: We have somewhat higher fertility and also somewhat higher immigration.
[27:48] SPEAKER_00: There's not going to be a talk about politics.
[27:50] Let's see how all of that holds up after a couple of years of
[27:54] the current administration.
[27:55] SPEAKER_00: But at least in the past,
[27:57] SPEAKER_00: we've been attracting an attractive place to invest,
[28:00] SPEAKER_00: an attractive place to build factories,
[28:02] SPEAKER_00: an attractive place to buy companies,
[28:05] SPEAKER_00: an attractive place to do a lot of things.
[28:08] SPEAKER_00: And so money flows in from abroad.
[28:09] SPEAKER_00: Okay.
[28:12] china is a big china and germany are both big surplus countries
[28:17] probably for bad
[28:19] reasons uh although given given where they are maybe that's not
[28:25] a uh it may be
[28:27] SPEAKER_00: better than the alternatives but china just has too much uh too much
[28:34] SPEAKER_00: It's tried to maintain extremely high level of investment,
[28:40] SPEAKER_00: but it's running into really severe diminishing returns.
[28:43] SPEAKER_00: To some extent, that's true in Germany as well.
[28:46] SPEAKER_00: So they export a bunch of their saving.
[28:49] SPEAKER_00: Probably,
[28:50] SPEAKER_00: well,
[28:51] what they really should do is fundamentally reform their
[28:54] economy so they don't have
[28:56] SPEAKER_00: this excess saving.
[28:57] But the Chinese and the Germans in their different ways have
[29:01] been unwilling to do that,
[29:02] SPEAKER_00: and so they export a bunch of capital.
[29:05] SPEAKER_00: That explains a lot of what you see.
[29:08] That IMF study on bilateral trade balances found that
[29:13] macroeconomic factors are a
[29:16] SPEAKER_00: big source,
[29:17] particularly if we look at the changes in bilateral balances
[29:20] that have taken place
[29:21] SPEAKER_00: over time.
[29:22] SPEAKER_00: Macroeconomic factors,
[29:24] SPEAKER_00: countries running overall trade deficits or surpluses,
[29:27] SPEAKER_00: are the biggest single cause.
[29:30] SPEAKER_00: But there are also idiosyncratic factors.
[29:33] SPEAKER_00: trade imbalances, which often they have.
[29:39] It's usually not too hard once you take a look to figure out
[29:43] what's going on.
[29:45] I thought it might be useful to have an example that is not
[29:49] tied in with current
[29:50] SPEAKER_00: events and doesn't have anything to do with
[29:52] SPEAKER_00: the kinds of things that Donald Trump is going on about.
[29:54] SPEAKER_00: So I went looking back.
[29:57] SPEAKER_00: I had a suspicion it turns out to be true.
[29:59] SPEAKER_00: I went back and looked at the U.S.
[30:02] SPEAKER_00: trade balance in the years immediately before the Civil War.
[30:07] SPEAKER_00: That's going way back there.
[30:12] SPEAKER_00: And it turns out that before the Civil War, the U.S.
[30:16] consistently ran trade deficits for many of the same reasons it
[30:21] runs trade deficits now.
[30:23] America was a rapidly growing economy,
[30:26] both because we were doing very well technologically,
[30:30] SPEAKER_00: obviously at a far lower level,
[30:31] SPEAKER_00: but we were a country that was innovative and making rapid progress.
[30:35] SPEAKER_00: And we also had a rapidly growing population thanks to immigration.
[30:40] SPEAKER_00: So America was a place that had a lot of investment opportunities,
[30:45] SPEAKER_00: especially we were building a lot of railroads.
[30:47] SPEAKER_00: And railroads were one thing that investors elsewhere bought into.
[30:53] SPEAKER_00: There was a lot of
[30:54] SPEAKER_00: global sales of railway bonds at that point in history.
[31:00] So we ran an overall trade deficit,
[31:03] but we actually ran a surplus with Britain.
[31:07] SPEAKER_00: kind of interesting, right?
[31:08] Britain was one of the great,
[31:10] was the biggest foreign investor of the time.
[31:12] Britain overall was a surplus country,
[31:14] but they did run a deficit with the United States.
[31:18] SPEAKER_00: What was that about?
[31:20] SPEAKER_00: Well,
[31:20] it's actually not very hard to figure out if you think about
[31:23] what was Britain's
[31:24] biggest manufacturing industry at the time and what was
[31:27] America's biggest export at
[31:28] SPEAKER_00: the time.
[31:29] SPEAKER_00: Our biggest export was cotton.
[31:32] SPEAKER_00: Yeah.
[31:34] SPEAKER_00: Obviously, there's a lot that should be said about U.S.
[31:38] SPEAKER_00: cotton production at the time.
[31:40] SPEAKER_00: Let us not forget, well, you know, slavery.
[31:45] SPEAKER_00: But we remained a cotton exporter even after slavery was abolished,
[31:50] SPEAKER_00: although I'm not sure that what followed was all that much better.
[31:54] But also,
[31:55] we did have this suitable soil and climate for producing a lot
[31:59] of the world's cotton.
[32:01] SPEAKER_00: Britain was still dominant in the world textile industry.
[32:05] SPEAKER_00: They got there first and industrialization really began with textiles.
[32:10] And so this was,
[32:13] so here we have a stylized picture showing the relevant
[32:18] patterns of trade.
[32:20] SPEAKER_00: America selling a lot of cotton to Britain.
[32:24] SPEAKER_00: Britain's selling cloth to the world,
[32:26] SPEAKER_00: some of it back to the United States,
[32:28] SPEAKER_00: although we did have our own textile industry and we had tariffs,
[32:32] SPEAKER_00: but selling a lot of it on to other countries.
[32:35] And so you had the specifics of the nature of the relationship
[32:41] between the US and the UK.
[32:43] SPEAKER_00: us as a place that grew a lot of cotton,
[32:45] SPEAKER_00: the UK is a place that made a lot of cotton into textiles,
[32:51] SPEAKER_00: led to us running a bilateral surplus.
[32:57] SPEAKER_00: Interestingly, since Donald Trump
[33:00] SPEAKER_00: Sorry, his name will crop up now and then.
[33:02] Since Donald Trump insists that Canada's trade surplus with the
[33:07] United States means
[33:10] SPEAKER_00: that we are subsidizing them,
[33:12] I don't think anybody in Britain in 1859 thought that they were
[33:18] subsidizing America
[33:20] SPEAKER_00: by buying our cotton.
[33:21] SPEAKER_00: If anything,
[33:23] SPEAKER_00: they kind of saw it as,
[33:25] SPEAKER_00: you know,
[33:25] SPEAKER_00: it was really important for them to buy a lot of cotton for the U.S.
[33:28] SPEAKER_00: It was the basis of their industry,
[33:30] SPEAKER_00: which had,
[33:32] SPEAKER_00: now slavery really does come into the picture here,
[33:35] SPEAKER_00: when the Civil War broke out.
[33:36] SPEAKER_00: Yeah.
[33:39] SPEAKER_00: Among the casualties,
[33:40] SPEAKER_00: I shouldn't say casualties,
[33:41] because the casualties were really actually people dying or
[33:44] getting wounded,
[33:45] but among the places that was hurt as a kind of collateral
[33:51] effect of the U.S.
[33:52] SPEAKER_00: Civil War was British manufacturing.
[33:55] the textile mills of Manchester were suddenly starved of cotton
[34:01] because there was a
[34:02] SPEAKER_00: war going on,
[34:03] SPEAKER_00: and particularly after about two years,
[34:05] SPEAKER_00: the Union had a very effective blockade of the South.
[34:08] There was just not a lot of southern cotton making its way out
[34:11] to Britain,
[34:12] SPEAKER_00: which was really bad for British industry.
[34:14] SPEAKER_00: And there were certainly people in Britain
[34:17] SPEAKER_00: industrialists who said, we need to step in here.
[34:22] SPEAKER_00: Our financial interests are at stake.
[34:24] SPEAKER_00: We should send the Royal Navy,
[34:27] which at the time hugely outclassed anything that even the
[34:32] union was able to put to sea.
[34:35] SPEAKER_00: We send the Royal Navy and demand a lifting of the blockade,
[34:39] SPEAKER_00: maybe even intervene on the side of the South,
[34:41] SPEAKER_00: because after all,
[34:44] SPEAKER_00: They,
[34:44] SPEAKER_00: you know,
[34:45] it's the southern United States that is an economically
[34:48] valuable territory to Great Britain.
[34:54] SPEAKER_00: It didn't happen.
[34:55] Britain did not intervene and did not intervene because there
[34:59] were sufficient
[35:00] number of people in Britain and especially British workers who
[35:04] thought that slavery
[35:06] SPEAKER_00: was evil,
[35:08] SPEAKER_00: which it is,
[35:09] SPEAKER_00: and who basically said,
[35:11] SPEAKER_00: we will go on strike.
[35:13] SPEAKER_00: We will not allow Britain to intervene on the side of slave owners.
[35:19] SPEAKER_00: It was,
[35:19] SPEAKER_00: if you like,
[35:20] SPEAKER_00: it was the finest moment of the British working class,
[35:23] SPEAKER_00: even though a lot of them were unemployed because of the effects,
[35:28] SPEAKER_00: side effects of the U.S.
[35:29] SPEAKER_00: Civil War.
[35:30] They were very clear that they were not going to allow Britain
[35:34] to be a defender of slavery.
[35:37] So that's a historical example of a bilateral trade imbalance
[35:42] that was kind of idiosyncratic.
[35:45] SPEAKER_00: The U.S.
[35:46] SPEAKER_00: was an overall deficit country but ran a surplus with Britain.
[35:50] Britain was an overall surplus country but ran a deficit with
[35:52] the United States
[35:53] SPEAKER_00: because of the specifics of what they produced and consumed.
[36:01] SPEAKER_00: Looking at the current situation of world trade,
[36:06] SPEAKER_00: There are a number of places where there are large bilateral imbalances,
[36:17] SPEAKER_00: some of them not what you might expect.
[36:21] SPEAKER_00: And some of them, on the other hand, being exactly what you would expect.
[36:25] SPEAKER_00: And so here I just have a little slide saying...
[36:28] SPEAKER_00: If we look at current trade,
[36:32] SPEAKER_00: what things stand out as being kind of anomalous,
[36:36] SPEAKER_00: although then there turns out to be an explanation,
[36:39] and what things are not anomalous given sort of obvious aspects
[36:45] of the situation.
[36:46] SPEAKER_00: So one of them is the United States,
[36:50] SPEAKER_00: we don't run trade surpluses with very many countries,
[36:53] SPEAKER_00: but we do run a substantial trade surplus with the Netherlands.
[36:59] SPEAKER_00: So what is that?
[36:59] SPEAKER_00: Do people, are the Dutch especially fond of American products?
[37:06] SPEAKER_00: Well, no.
[37:06] SPEAKER_00: What that's really about is Rotterdam.
[37:09] one of the world's biggest ports,
[37:12] and the port of entry for a lot of stuff going into Europe.
[37:17] So a lot of American goods that are ultimately going on to
[37:20] places elsewhere in Europe go first.
[37:24] They're unloaded in Rotterdam,
[37:25] and so they are recorded as exports to the Netherlands.
[37:30] SPEAKER_00: Now,
[37:31] SPEAKER_00: you might ask,
[37:31] SPEAKER_00: well,
[37:32] aren't European exports to the United States also going through Rotterdam?
[37:36] SPEAKER_00: And for whatever reason, not quite so much.
[37:42] SPEAKER_00: Apparently,
[37:43] and someone better informed than me would be able to tell you
[37:47] more about exactly
[37:47] SPEAKER_00: why this is true,
[37:48] SPEAKER_00: but apparently when Germany ships stuff to the United States,
[37:51] SPEAKER_00: a lot of that...
[37:53] When the US ships stuff to Germany,
[37:56] a lot of it comes in through Rotterdam.
[37:58] When Germany ships stuff to the United States,
[38:00] it tends to go out via other places like Hamburg.
[38:04] And so the result is that you get what is really a spurious US
[38:09] trade surplus with
[38:10] SPEAKER_00: the Netherlands.
[38:11] SPEAKER_00: It isn't really about the Netherlands at all.
[38:14] SPEAKER_00: It's simply about the special status of Rotterdam.
[38:18] SPEAKER_00: Another anomaly, the U.S.
[38:20] SPEAKER_00: runs an especially large trade deficit with Ireland,
[38:24] SPEAKER_00: at least compared with the size of the Irish economy.
[38:27] SPEAKER_00: You know, Ireland is a really quite small country, not a very large GDP.
[38:34] SPEAKER_00: And yet it's a pretty big U.S.
[38:37] SPEAKER_00: trade deficit with Ireland,
[38:40] SPEAKER_00: which as of 2022,
[38:44] SPEAKER_00: for which the data were readily available,
[38:47] Ireland was running a trade surplus with the United States of
[38:51] around 12% of its GDP,
[38:53] SPEAKER_00: which is just enormous,
[38:54] just completely out of bounds relative to the kinds of things
[38:58] you normally see.
[38:59] SPEAKER_00: So what's that about?
[39:00] SPEAKER_00: And the answer is...
[39:03] SPEAKER_00: tax evasion.
[39:04] SPEAKER_00: Sorry, tax avoidance.
[39:06] SPEAKER_00: Always got to be careful.
[39:07] SPEAKER_00: If you say tax evasion,
[39:08] a corporate lawyer will sue you immediately if what they're
[39:12] doing is legal.
[39:14] If it's legal,
[39:15] even if it's clearly unethical and all of that,
[39:19] then it's tax avoidance.
[39:20] SPEAKER_00: And I think what's going on with Ireland is tax avoidance.
[39:24] SPEAKER_00: Ireland has a low corporate tax rate.
[39:28] SPEAKER_00: A limited number of corporations find ways to
[39:34] SPEAKER_00: make sure that their global profits manifest in Ireland.
[39:40] This is particularly true for tech companies,
[39:42] which make sure that they pay a lot of...
[39:47] SPEAKER_00: royalties for intellectual property to their Irish subsidiary.
[39:50] SPEAKER_00: Um,
[39:52] SPEAKER_00: it was,
[39:52] SPEAKER_00: there was one year when Irish GDP suddenly grew by 25%,
[39:56] SPEAKER_00: which obviously didn't really,
[39:59] SPEAKER_00: but that was apparently just a change in tax strategy,
[40:02] SPEAKER_00: mostly by Apple.
[40:03] SPEAKER_00: Um, and, uh,
[40:06] I called it leprechaun economics,
[40:08] which has been widely adopted since then.
[40:11] SPEAKER_00: This is trade in physical goods.
[40:15] SPEAKER_00: So it's probably not so much Apple.
[40:18] SPEAKER_00: I believe it's mostly pharmaceuticals.
[40:21] SPEAKER_00: What's happening here is that pharma companies...
[40:25] SPEAKER_00: which actually do, you know, they do produce pharmaceuticals in Ireland.
[40:29] But what they really do is they sell the pharmaceuticals to
[40:34] their own branches in
[40:36] SPEAKER_00: the United States.
[40:38] SPEAKER_00: And they do so at artificially inflated prices.
[40:42] SPEAKER_00: They use the transfer prices, which are just internal.
[40:45] SPEAKER_00: There's no external way to, you know, price to compare them against.
[40:50] SPEAKER_00: And they sell the stuff to the United States.
[40:54] really to themselves at artificially inflated prices,
[40:57] so as to make their U.S.
[41:00] operations appear unprofitable and make their Irish operations
[41:03] appear super profitable,
[41:06] inflating the amount of profit that is reported in a low tax jurisdiction.
[41:12] So this is a case where the trade deficit that we run with
[41:17] Ireland is in fact a bad thing,
[41:19] SPEAKER_00: not because trade deficits themselves are inherently bad,
[41:22] SPEAKER_00: but because it's reflecting something that is a bad thing,
[41:25] which is that corporations are avoiding a lot of taxes by
[41:29] exploiting international jurisdictions.
[41:34] SPEAKER_00: Okay, those are anomalies.
[41:36] SPEAKER_00: What are non-anomalies are the U.S.
[41:39] SPEAKER_00: trade deficits with our neighbors to the north and the south,
[41:42] SPEAKER_00: our trade deficit with Canada,
[41:44] SPEAKER_00: our trade deficit with Mexico.
[41:47] SPEAKER_00: And I'm going to repeat a slide I've used in an earlier exposition,
[41:54] SPEAKER_00: which is to say that part of this,
[41:56] SPEAKER_00: I call this the push-me-pull-you theory of imbalances.
[42:01] SPEAKER_00: A lot of what's going on is that the two biggest economies in the world,
[42:07] SPEAKER_00: China and the United States,
[42:09] SPEAKER_00: have very different overall macroeconomic positions in terms of trade.
[42:14] SPEAKER_00: The U.S.
[42:14] SPEAKER_00: runs big deficits.
[42:17] SPEAKER_00: China runs big surpluses.
[42:19] SPEAKER_00: Canada and Mexico, well, they...
[42:22] SPEAKER_00: The US runs deficits with everybody, including our neighbors.
[42:27] China runs surpluses with just about everybody,
[42:30] including Canada and Mexico.
[42:32] SPEAKER_00: Canada and Mexico themselves have overall roughly balanced trade,
[42:35] but that translates into large bilateral imbalances with the
[42:40] United States.
[42:42] SPEAKER_00: And then on top of that, there are the specifics of what they produce.
[42:46] SPEAKER_00: And it turns out that the U.S.
[42:48] SPEAKER_00: trade deficit with Canada is entirely accounted for by oil and gas.
[42:54] SPEAKER_00: The Athabasca tar sands are there.
[42:57] SPEAKER_00: They're in the middle of a large continent.
[43:00] SPEAKER_00: The stuff gets out by pipeline.
[43:03] The natural place to send stuff by pipeline is the north
[43:10] central United States.
[43:12] SPEAKER_00: So the Midwest gets a lot of its oil from Canada.
[43:16] It buys the oil because actually Canadian oil is significantly
[43:21] cheaper than oil
[43:22] SPEAKER_00: from other sources.
[43:24] SPEAKER_00: And that's kind of,
[43:25] SPEAKER_00: you know,
[43:26] SPEAKER_00: functionally,
[43:26] that's a lot like the role of cotton in bilateral trade
[43:30] imbalances before the Civil War.
[43:31] SPEAKER_00: It's just the Canadian oil.
[43:34] SPEAKER_00: Mexico is a subtler case.
[43:38] SPEAKER_00: I would argue that labor-intensive manufacturing,
[43:41] SPEAKER_00: in particular the labor-intensive components of the automobile industry,
[43:47] SPEAKER_00: tend to be located in Mexico.
[43:49] SPEAKER_00: You want them to be close enough that you can do just-in-time production.
[43:54] You don't want to locate that stuff on the other side of the
[43:57] Pacific where it can
[43:58] take a couple of weeks for a container ship to make its way
[44:02] from Shanghai to Los Angeles.
[44:05] but you do want it to be in Mexico where wages are a lot lower
[44:09] than they are in the
[44:10] SPEAKER_00: United States or Canada.
[44:12] And so that ends up being a kind of a special export that is
[44:18] unique to Mexico U.S.
[44:20] SPEAKER_00: trade, but ends up functionally being similar to the Athabasca tar sands.
[44:27] SPEAKER_00: It's not really a problem.
[44:29] It certainly doesn't mean that the United States is subsidizing
[44:34] Canada or Mexico.
[44:35] SPEAKER_00: This is just trade doing what trade does.
[44:41] SPEAKER_00: That's a very quick overview of what the world trading system looks like.
[44:49] SPEAKER_00: Infinite amounts of further detail.
[44:53] SPEAKER_00: You can go much deeper in.
[44:55] SPEAKER_00: But the main point I think right now is to say
[45:00] SPEAKER_00: For the most part,
[45:01] you really should not get much worked up about the fact that
[45:06] any individual,
[45:07] SPEAKER_00: that trade between any particular pair of countries isn't balanced.
[45:14] SPEAKER_00: Significant imbalances,
[45:15] SPEAKER_00: even in overall trade,
[45:17] are kind of a natural part of what is going to happen in a
[45:20] world where capital can
[45:22] SPEAKER_00: flow across borders in search of higher returns.
[45:26] And imbalanced trade between any pair of countries is going to
[45:31] happen both because
[45:33] SPEAKER_00: overall trade for any one country is...
[45:36] SPEAKER_00: unlikely to be balanced and because there are specialized resources,
[45:42] specialized differences in the structure of production and the
[45:46] things that
[45:47] countries can produce that will lead to there being some
[45:51] bilateral imbalances.
[45:53] SPEAKER_00: In a way, what's kind of remarkable is that we don't see more of that.
[45:59] that we do see an awful lot of more or less symmetric trade
[46:03] across the world,
[46:04] which basically we think reflects the fact that advanced
[46:09] economies in particular
[46:11] SPEAKER_00: tend to produce quite similar stuff that is differentiated in
[46:16] SPEAKER_00: Ways that matter to consumers, but it isn't very different.
[46:21] SPEAKER_00: The U.S.
[46:21] SPEAKER_00: and Canada, the U.S.
[46:23] SPEAKER_00: and any place in Western Europe look very similar,
[46:26] and actually there's a lot of intra-industry trade in which
[46:30] goods that are...
[46:33] SPEAKER_00: fall within the same industrial classification are traded in both ways.
[46:37] SPEAKER_00: But there are going to be some significant bilateral imbalances.
[46:41] SPEAKER_00: And unless there's some special reason to think that they're problematic,
[46:47] SPEAKER_00: like Ireland's trade surplus,
[46:49] SPEAKER_00: which is a tax avoidance thing,
[46:53] SPEAKER_00: they're nothing to get worked up about.
[46:55] SPEAKER_00: Certainly not a sign that things are dreadfully unfair.
[46:59] SPEAKER_00: And always bear that in mind.
[47:03] I think that what you should say about international trade
[47:05] flows is that for the
[47:06] SPEAKER_00: most part,
[47:07] SPEAKER_00: they should be presumed innocent unless proven guilty.
[47:10] And some will be found guilty,
[47:11] but not the ones that have Donald Trump all worked up.
[47:16] And that got us apparently to the brink of a highly destructive
[47:20] trade war a few
[47:20] SPEAKER_00: days ago,
[47:22] SPEAKER_00: now put on hold for a month,
[47:23] SPEAKER_00: but we'll find out what the future holds.
[47:26] SPEAKER_00: And with that,
[47:28] SPEAKER_00: Enjoy the rest of your day.

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