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PaperclipPerfector  1mo ago (text post)   32538 thread views

Culture War Roundup for the week of April 7, 2025

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And what's the deal with "Critical Trade Theory?" Are trade deficits a good way to measure non-tariff trade barriers?

The premise must be that it's not really possible to calculate 'average' tariff levels, or the counterfactual amount of trade reduced by tariffs, as people were discussing here in a thread a few days ago. So they're just agnostically looking at the trade deficit level, and saying, if we have free floating exchange rates as the supposed global order post-bretton woods, this is supposed to (roughly) balance out naturally over time to equilibrate everyone's imports and exports. When a country sells more to the US than it buys from the US, that should push up their currency's value and push down the dollar, until the exports/imports from each are competitive with each other again.

If that trade balance doesn't (roughly) happen, it must be because the net-exporting country is devaluing their own currency against that of the net-importer country, by earning/buying the other currency and sitting on it. The positive ways of describing this are like "switzerland is fortifying their stockpile of foreign reserves as part of their monetary policy plan", or more neutrally "china is adjusting their target USD peg". The negative description would be "currency manipulation", which is what the trump team wrote in fine print on their big mathy chart that's being goofed on. Foreign holdings (may be a better chart somewhere) of USD reserves & treasuries is not the naive gut explanation "peasants lending money to the US", it's rather them buying & saving in our currency which happens to push on the exchange rate and make their exports more competitive in the US.

At the macro level, in 'real' terms of trade: your pile of goods & services that your country gets to enjoy are everything your domestic economy can create, plus everything you can import, minus anything you have to export. Exports are a real cost, where your country takes time/effort/materials to make something that someone else gets to enjoy. So we should all hope to be so lucky that anyone targets our country for their currency devaluing, allowing us to import more without paying for it with real exports. But that's at the macro national level. There are real losers on the micro level, like anyone trying to run an export business (who doesn't care at all who they sell their products to). Exporters can be very powerful & politically dominant in other countries, and maybe that's where we find Trump now, influenced by manufacturing business leaders (or trying to court/help their workers). Then there are also other potential motivations for going against the obvious economic benefit of maximizing import value, like the intangible value of maintaining a national manufacturing capability.

The premise must be that it's not really possible to calculate 'average' tariff levels, or the counterfactual amount of trade reduced by tariffs, as people were discussing here in a thread a few days ago. So they're just agnostically looking at the trade deficit level, and saying, if we have free floating exchange rates as the supposed global order post-bretton woods, this is supposed to (roughly) balance out naturally over time to equilibrate everyone's imports and exports. When a country sells more to the US than it buys from the US, that should push up their currency's value and push down the dollar, until the exports/imports from each are competitive with each other again.

Why would this happen? And why does this require price effects, demand elasticity, and asterisks in the formula?

If that trade balance doesn't (roughly) happen, it must be because the net-exporting country is devaluing their own currency against that of the net-importer country, by earning/buying the other currency and sitting on it. The positive ways of describing this are like "switzerland is fortifying their stockpile of foreign reserves as part of their monetary policy plan", or more neutrally "china is adjusting their target USD peg". The negative description would be "currency manipulation", which is what the trump team wrote in fine print on their big mathy chart that's being goofed on. Foreign holdings (may be a better chart somewhere) of USD reserves & treasuries is not the naive gut explanation "peasants lending money to the US", it's rather them buying & saving in our currency which happens to push on the exchange rate and make their exports more competitive in the US.

Why must it be currency devaluation, rather than comparative advantage? Geography is a non-tariff trade barrier between the USA and UK that the USA and Canada lack, but we trade different types of goods to each country, because the geographic commonalities between the USA and Canada also reduce geography-based comparative advantage.

And why does this require price effects, demand elasticity, and asterisks in the formula?

I don't think it does. The substack you linked posited that trump's team are smooth-brains because they canceled out those potential elasticity terms, and are literally just setting tariffs based on the pure trade deficit.

Why must it be currency devaluation, rather than comparative advantage?

Well the currency saving aspect is what makes it not really a truly free floating exchange rate (whether their intentions are to manipulate or not). It can be a bit messier in the real world, but the pure logical premise of a floating exchange rate is that if one side is exporting more than the other, then their currency is going to appreciate (more buy-pressure on their currency in the foreign exchange market and more sell-pressure on the net-importing country's currency). And eventually that prices their exports out of competitiveness, and/or makes the import-country's exports such a value that they start to out-compete, until the imbalance disappears.

Just googling for a basic source, here's an old paper from 1982 that explains the logic & evidence pretty well:

The great advantage of floating exchange rates is that the exchange rate adjusts to equilibrate a country's balance of payments. Domestic economic policy can be used to promote full employment or to maintain stable prices.

[...]

An appreciation of the U.S. dollar puts U.S. exporters at a disadvantage in world markets and forces domestic producers to compete with cheaper imports. In 1971, for the first time since 1873, the United States had a merchandise-trade deficit. Since 1971, the merchandise-trade balance has been in surplus in only 2 years. Despite the large recent deficits, the U.S. current-account balance has tended to fluctuate around zero, because of the strong performance of the services account.

[...]

Under fixed exchange rates, reserve assets and government bonds are used to finance balance-of-payments deficits. In the case of a deficit, such financing can go on only as long as the reserve assets last or as long as foreign countries are willing to accept the IOU's of the deficit country. In the case of a surplus, such financing can go on as long as the surplus nation is willing to accumulate reserve assets and claims on foreign countries.

I would think it to be impossible to run sustained trade surpluses against another country, without simultaneously saving in their foreign currency. But I'd be interested if I'm wrong in that.

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