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Unemployment and the Trade Deficit: It Really Isn’t That Complicated

For some reason there seems to be a big market in efforts to confuse the public about the relationship between unemployment and the trade deficit. Robert Samuelson gives us yet another example in his column today.

“By now, it must be obvious that U.S. trade deficits are connected loosely, if at all, with the unemployment rate, which is now 3.9 percent — the lowest since 2000. Meanwhile, the U.S. trade deficit in 2017 was $566 billion.

“The explanation for the apparent paradox is the dollar’s role as the major international currency, used to conduct trade and investment among many (non-U.S.) countries. The extra demand for dollars raises its exchange rate, making U.S. exports costlier and imports cheaper. The result is a structural U.S. trade deficit.”

This one makes pretty much zero sense. First of all, pointing to the low unemployment rate coinciding with a large trade deficits as evidence there is no link between unemployment and a trade deficit makes as much sense as pointing to a very underweight person suffering from the late stage cancer as an argument against any link between being seriously overweight and bad health.

This is not a serious argument. A trade deficit reduces demand in the economy. It means that some of our spending is creating demand in Europe or Mexico, rather than in the United States. Other things equal that means less demand in the United States and higher unemployment.

We can offset this lost demand with additional demand in the United States. We can have large budget deficits, as we do now. And we can have bubbles as we did in the late 1990s with the stock bubble and in the last decade with the housing bubble. That is why we can have a large trade deficit and low unemployment. It really is not hard.

The idea that the dollar’s position as a reserve currency forces it to run large trade deficits is also badly off. First, it is important to note that the dollar is a reserve currency, not the sole reserve currency. While it is the most important currency, countries also hold euros, pounds, yen, and even Swiss francs as reserve currencies. This does not force all of these countries (or blocs in the case of the euro) to run trade deficits.

More importantly, many countries, such as China and South Korea, hold hugely more dollars and other reserve currencies that can possibly be necessary to conduct their trade and protect them from unexpected fluctuations in capital flows. They do this to keep the value of the dollar up against their currency, which gives them a competitive advantage in trade. That is a deliberate policy that can be changed if we had a president who was concerned about currency management or “manipulation” as some presidential candidates called it.

Samuelson then goes on to complain about China’s development policy, which has lifted hundreds of millions of people out of poverty:

“As part of this program, China coerces technology transfers from American and other multinational companies to local businesses. Foreign companies receive a choice that is hard to refuse: Transfer your technology or lose access to China’s vast local market. In effect, Chinese businesses are being trained and financed by their foreign competitors. It’s high-technology extortion.”

Okay, let’s follow the bouncing ball here. Did anyone put a gun to the heads of our companies and force them to invest in China?

If so, our news outlets have neglected to report on it. As best I can tell, Boeing, Apple, and the rest have decided that it was in their interest to invest in China even with the conditions on technology transfer imposed by the Chinese government.

It’s sort of like when the Supreme Court ruled that workers voluntarily sign away their right to have a class action suit against an employer when they take a job with a company that requires individual arbitration as an alternative. The difference is that we might think that Boeing or Apple are a bit better situated to protect their interests than a typical worker negotiating with a large employer.

The rest of Samuelson’s story is also dubious. Let’s carry this one through. China takes advantage of technology developed by U.S. corporations to produce goods better and cheaper than our corporations. This allows people in China, other countries, and even the United States to benefit from lower cost goods and services. What’s the problem?

Yes, our corporations have lower profits than would otherwise be the case. This may also reduce the pay of some highly skilled engineers, technicians, and scientists. As we say in advanced economics, so what?

Yeah, Samuelson is upset about practices of the Chinese government that may benefit the bulk of the world’s population at the expense of some U.S. shareholders and highly paid workers. That’s not a concern for the U.S. economy, it’s a concern for the rich in the United States.

This column originally appeared in Beat the Press.

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Dean Baker is the senior economist at the Center for Economic and Policy Research in Washington, DC. 

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