Us. Im alex pollock from the r street institute. And we welcome you on trade deficits and the Trump Administration. It goes without saying debates about trade, tariffs, other barriers to trade, balance of trade and payments and shifts in foreign exchanges, whether the flee of gold in old bays or reserves nominated in fiat currencies now have a long and controversial history in domestics and in politics. These debates feature the famous and essential contrast between the interests of producers on one side and those of consumers on the other, abiding asymmetry and pressures for adjustment between countries with persistent deficits like the u. S. Versus those with persistent surplus, germany for example. Naturally throughout this is the desire of politicians to get and remain in office. Political economy is certainly the accurate term here. Discussions of trade deficits cannot be divorced from the International Monetary system, levels of Exchange Rates or role of the u. S. Dollar as the dom nantz reserve currency or role of the United States as a seay haven for capital. We might say one of the key things the United States produced is a social system that does serve so well as a safe haven for saving some capital. You could say what john maken liked to call the wealth Storage Service effectively is traded internationally for net imports. Today, we have truly distinguished panel to address the economic questions of trade deficits against the current Political Forces in play. Each member of the panel will speak 13 to 15 minutes. Opening comments after which well give the panelists a chance to react to each others ideas or clarify their points. After that, well open the floor to your questions and we will adjourn promptly at 12 00. Let me introduce the panelists in the order in which they will speak. First will be jeff frankel, the james w. Harpo professor of Capital Growth and director the program in finance and macroeconomics at the National Bureau of Economic Research where hes on the Cycle Academy and Research Interests including international at finance commodities and financial issues. Next is ann krieger, professor of economics at Johns Hopkins university, senior fellow at the Stanford Center for International Development and senior fellow for the Hoover Institution and previously first deputy managing director of the International Monetary fund and past president of the American Economic association and published extensively on the topic of the day. Our third speaker, bob aliber is Professor Emeritus of economics and finance at the institute of Chicago School of business and bob has written extensively on economic finance and banking and Exchange Rates on the global flow of capital and its role in crisises, the coauthor of fifth to seventh editions of the class tick manias, panics and crashes and author of the International Money game. Next will be Claude Barfield a resident scholar at aei, specializing in International Trade policy. His work includes trade policy in china and east asia, world trade intellectual policy and books include free trade sovereignty democracy, the free World Trade Association swap how trade works and hightech protectionism, irrationality of antidumping laws. Our last speak, desmond lachman, International Economics and International Trade and the euro area and international crisis. Previously at smith barney and Deputy Director at the International Monetary fund and he has done a great job organizing this conference. Thank you, desmond. Jeff, welcome back to aei. You have the floor. Thank you, alex. Thank you all for coming. Its an honor to be leading off this very distinguished panel. I could try to cover all the things that President Trump has said and done in the area of trade that i would view as illadvised, but we have 15 minutes each so i cant really do that. I will say that the i dont think anyone but donald trump could threaten to cancel a u. S. Freetrade agreement in the midst of the worst Nuclear Crisis weve had in 55 years with north korea. But i am going to stick to five trade fallacies which are up on my slides when it comes up. I think you have to push your button. Advance it one and see if youre there. Very good. Thank you. These are fallacies, i mean theyre widely shared, not just donald trump. Fallacy number one, u. S. Trade negotiates have been outnegotiated by those from other countries. Wrong. Remember the president ial debate where tumble kept interrupting his opponent and saying, wrong with an exclamation point. I will do that a few times. In most trade negotiations significant ones in the last 20 years included tpp and before that, nafta, the United States has been able to get most of what it asked for overwhelmingly. Thats a side effect of being recognized as the leader of the International Order. Most countries have benefitted from the International Order and we have benefitted at least as much as everyone else and thats been recognized. I think its important to retain that role as leader of the International Order and one ground i would fault trump is he doesnt even think thats worth trying to keep. Lets get on the subject how capable our trade negotiates have been versus other countries. Most of these trade agreements resulted in other countries lowering barriers against our experts more than we have had to lower barriers against imports for the simple reason they started off with high tariffs on other barriers and we started off with low barriers. More recently agreements had to do with tariffs and deeper integration and u. S. Demands have driven the process and weve gotten most of what we wanted. People might talk about a different priority how important it is, something on this list is important, labor rights, environment, investor dispute settlement and Industrial Property rights. Weve been pushing that in the tpp. Were supposedly renegotiating nafta, a logical question since canada and mexico said, okay, lets do it. It can be modernized and so on, how would that be done . I have a list i wont go into the five or six different ways nafta can be modernized and expanded. Guess what, theyre all in the tpp. My advice there is go back to the tpp or else try to make nafta like the tepp. One of the funniest things trump has said tpp. The negotiators for germany have done a better job than the u. S. If you take it at face value he believes theres a Job Description for trade negotiate for germany. Germany outsourced that job long ago to a union and dont negotiate their own trade policy. I infer what he really means is he observes germany runs a lateral surplus visavis the u. S. We have a deficit. It reflects bad trade agreements. Wrong. Lets say we observe country a runs a bilateral trade deficit with country c it generally means a combination of their causes. A stands for america and c stands for china, all three of these are relevant. First, country a has a trade deficit overall. Second, country c has a trade surplus overall. Thats true of the u. S. And china. Three, country c needs to earn a structural surplus with countries like a in order to pay for a structural deficit with some other countries which in this case would be exporters of oil and other commodities. Ill show you a graph in a minute because it includes with china. If we were to stop importing some good Consumer Electronics from china we would import more from somewhere else, other Asian Countries, would not affect our overall trade deficit more relevant. I always tell my students about the folly of thinking bilateral trade imbalances are important. If i tell the guy who cuts my hair, i dont want to pay you any money, i want to give you a lecture in economics. He for some reason doesnt think thats right payment. He wants to me to pay in money and i earn my income teaching at harvard and they pay me and it all works out just fine. No need to look at bilateral balances. Heres just for china even though the trade surplus has come down quite a bit, they still have an overall slight trade surplus, moderate trade surplus, lets say, and they run a trade deficit in primary products and manufacturing products. Thats part of why they run a surplus visavis the United States and run a deficit with comment exporting countries. Fallacy number three. A trade deficit indicates the absence of a level playing field. Wrong. There is no correlation, at least mow positive correlation between countries tariff trades and trade balances overall or bilateral. I have a graph on that for you in a moment. Rather, trade deficits are macroeconomic phenomena. Im sure the people on the panel are going to agree with this. They are in a proximate sense influenced by the Exchange Rates and bedrock. More fundamental sense determined by National Saving and investment. The u. S. Has run a current account deficit since 1982 because National Saving has been low since 1982. Ill show you a graph on that. This is private savings compared to our past and other countries and low public savings namely budget deficit. We could think of examples along the way of the famous twin deficits. The period of 2001 to 2007 is a good example when we had big tax cuts, big increases in spending, both military and domestic. We converted a record trade surplus to record trade deficit and followed up as National Saving as well as a trade deficit. Incidentally, six months ago i had the privilege of being on a panel in december before donald trump took office. Many of us thought he would be repeating the fiscal policies of bush and reagan, leading to a bigger biggest deficit and bigger trade deficit. As of now since he doesnt have any legislation through congress its much harder to predict what will happen there. One of the questions we were asked to talk about, china, germany, japan, they all run large currency surpluses. One line reason for that is they have high National Savings rates, doesnt have to do with their trade policies. Heres a graph i promised, which is from carolyn froind. The vertical axis is the trade balance from zero to up is positive. A surplus and down is deficit. If theres any relationship at all, its an inverse one. This is illustrating that is not the case. The countries highly protectionsist have high trade surpluses. The free trade countries have the trade surpluses. On average, the countries with high tariff protection for some reason trade reason have trade probably because of other trade policy. Excessive deficit or something. We shouldnt need a graph, its a matter of National Savings identity. That the current account balance is equal to National Saving minus investment. You can see the graph that the only reason they differ is theres measured in different ways. The trend was strongly downwards in the current account. Sp swing with the business cycle. Downwards in National Saving. Fallacy number four, whatever the cause trade deficits are bad and subtract from growth. The trade balance. Seems like a rsubtracts from gt. If you cut the and creates jobs. Im not going to say wrong here. Its not always wrong. If you have excess capacity in the economy. Unemployment is high. A boost to export can add to employment. As of now and the last couple years were at full employment. I would say. And pz increase in export if it suck seepded in improving the trader balance wuf to pull workers away from other activity. And wouldnt add to the over all rate of out put and employment. Theres another respect in which its not always wrong. If countries that run current account deficits that means International Debt is rising. Kp for normal countries most countries eventually theres a day of reck noning. It impairing credit. The u. S. Seems to be immune. I was worried about this for a while. It didnt happen in 2008. If it didnt happen in 2008, it being foreigners worrying about u. S. Credit worthiness. Its going to take a lot more doing before we squander our position as elite International Currency and able to borrow easily at low Interest Rates on world markets. The important point here fallacy four is trade deficits are not always bad news. Trade surpluses are not always good news. So an example of a rise in the trade deficit that was actually good news was in the late 90s. It was a companied by the longest u. S. Economic expansion on record. Unemployment got down lower than it is today. I think 4. 3 . It was the one time median Family Income was rising strongly. The second half of the 1990s. Which is interesting because so many people including the Obama Administration had they were trying to advance tpp and would of course nafta wasnt to great. Everyone seems to agree nafta was damaging. It is interesting that in the half decade after nafta, the United States had the best economic record that we have had in the last 35 years. In terms of longest expansion, most strongest growth in productivity, strongest growth in wages, lowest Unemployment Rate. Most widely shared in terms of Income Distribution and so on. Im not saying thats because of nafta. It was largely because of an investment boom is what was driving that expansion. Brought unemployment 3. 8 . What did i say a minute ago . By 2000. And conversely you show me a country that has a sudden kbruchlt in the trade balance and ill show you a country thats gone into recession. Lower income means lower import. The main example of that, this is the last great the Great Recession of ten years ago. So this is a graph of growth rates, gdp growth rate is the blue line. The trade balance is the dotted red line. This is from michael clin. But the of course the one time when in recent decades when the trade balance abruptly fell in half was the period of the Great Recession. When income fell sharply so imports fell sharply. The point of that is trade deficits is one illustration. Trade deficits are not always bad news. Improvements in the trade balance are not always good news. Youre at five with one minute left. Last fallacy. Trade explains the stag nags in economic since the turn of probably wrong. Of course imports create winners and losers. That seems to be news to some people. Any big change does. If we block import thats will create winners and losers. Take the example of trumps moves against imports of steel and aluminum. Leave aside the fact that the section 232 this is a National Security issue is flimsy at best. If we did succeed in blocking imporlts of steel and aluminum that would raise cost to u. S. Manufacturing. Produce automobiles for example. Raise the cost of live lg in the United States. And hurt our exports. Various other ways in which blocking expoerts reduce imports. It really is the case that difference in imports and exports determined by Macro Economic grounds. If you block import youll reduce export through various channels. Yes specific industry ands localities suffer from import competition. Maybe we hadnt realized how long lasting and deep that is. It leaves out if were concerned about Income Distribution it leaves out two big factors on the plus side. Trade creates export jobs. Pay higher wages at other job ands lowers the price of consumer import goods. Its hard to say on net whether and how much trade raises inequalfy or lowers it. It increases the size of the pie. What is does to the distribution of the pie is an open question. Theres debate about it. I think its clearly not the major reason. The bigs reason for the increase in inequality we have had over 30 years or the fact median Family Income in the most recent figures even then has stagnated. For the last since the turn of the century. Its probably less support and Tech Knowledge progress and the fact education hasnt kept up with the demand for skilled workers and other factors. In my view, you dont actually need to be able to a portion the responsibility for the increase in equality among trade vs. Technology and other factors. Th list of policies that would be advisable to increase the pie and do it vmt regardless of how much emphasis you put on trade versus other factors. Thank you. Were going to be plagued a bit by im trying to ill let you. In any event. Anyway. There we go. I started with the same thing that jeff did. Namely its long standing issu