Impact of trade deficits on the u. S. Economy hosted by Washington International trade association. This is about an hour and a half. Good morning, thank you for joining us. My name is kenneth levinsohn, i and the executive rector of the washington trade association. We are delighted so many of you braved the elements to be her today. But come also to our friends watching on cspan. Todays events follows a series we have had on the current trade agenda. We addressed the border withtment tax and trade china and the trade law toolbox. All of those all of those are available on our website, americastradepolicy. Com. All of our content as well, where we are looking at the future of trade anwill be hosting a series of events looking at things like new technologies such as 3d printing, intelligent vehicles, and the impact those would have on trade. We could not have time it much better trade last night the pre deficits and today he will issue an executive order on trade deficits. Tos our mission is educate about trade policy. We cannot package be happier than to have todays Panel Moderated by our friends and investor peter argyle. Have a discussion among the panelists and open it up for questions. Peter . Think you very much can. Thank you all who successfully braved the rain today. We have a very timely discussion topic today. It is at the very heart of the debate currently about u. S. Trade policy. We are very fortunate to have three recognized experts in this area of trade policy economic policy. You have files on them with details. Briefly to my left ear is rob cofounderhairman and of sonic, llc, a Consulting Firm specializing in economics, risk, and economic policy. He is also at the Georgetown University school of business, and previously served as undersecretary of commerce for economic affairs. His epidemic academic credentials include a phd in economics from harvard. In the middle is carolyn floyd, senior fellow at the Peterson Institute for interNational Economics. She has previous experience with the world bank, the imf, fed also has a phd in economics from columbia. To the far left in terms of at the smith school of business. Your but the smith effect. I do not know whether peter will reveal that are not. He has been there at the Business School for many years. Before that he was the director of economics at the International Trade commission. He also has a phd in economics from the State University of new york at albany. Lets start by defining what we are talking about. Parts to the trade balance. Theres merchandise trade, manufactures and raw materials, trade,re is services kingsway financial services, express delivery, computerrelated services, entertainment services, and so forth. Last year, the u. S. Ran a merchandise trade deficit of approximately 750 billion. The Services Trade surplus of about 250 billion. Basically we had a quote, trade deficit of 500 billion. That trade deficit was not the largest on record. 20002016, we had six years and which merchandise trade deficits was higher than last year and we had 10 years in which it was lower. We had trade merchandise deficits continuously since 1976. The Services Trade surplus of record,r also was not a it was the third highest surplus that we had had in services. We had a serces trade surplus continuously since 1971. In the current political discussion, people who talk about trade deficits are talking about theerchandise trade deficit. Fyi, our largest merchandise trade deficit for 2016 were with , mexico,pan, germany ireland, vietnam, and italy. If you want to do anything about the trade deficit, cut back on your pasta intake. [laughter] our largest merchandise export mexico chinaanada japan u. K. Germany and korea. Love the countries with whom we have the largest merchandise trade deficits are also countries that are our largest merchandise export markets. The current debate about trade deficits has been framed by the Trump Administration by their assertion that trade deficits are very important and damaging to the u. S. Economy because they indicate jobs that have been lost by overseas countries, foreign countries, largely because of unfair trade practices. We want to look into this issue of the trade deficit and how it relates to trade policy, how it ultimately relates to other factors. Their speakers present initial comments, i ask them to coider three questions. One, what are the principal reasons for the trade deficit . Overall and bilaterally. We be, w worried should about the continuing merchandise trade deficit, or its current size . Third, what if anything should the u. S. Do about its trade deficit . Go first. Arolyn to mike is yours. Thank you. Its a pleasure to be here. I was planning to walk down here from the petern institute and pick up a copy coffee at stbucks, but instead find coffee here, so my bilateral deficit was starbucks has now improved a little bit. It would have gotten worse if i thought that coffee. Instead i came here and had one. Although because of the rain i tookn uber here, so now my bilateral deficit with uber has expanded. Im not really worried about either of these because fortunately i have a surplus with my employers, they keep paying me for my services. At this point in my life im saving. Im not really worried about these. This relates to the points i will make today. A focus on two things. One that it is the aggregate trade balance we should be worried about, unlike the fiscal balance which is all about fiscal policy, the trade balance actually has almost nothing to do with trade policy. Fiscal policy than with trade policy. That is 1. Im going to make. Trade balance is not about trade policy. This has me really concerned when i saw the point in the list they are going to be looking into for what we should be doing about the trade deficit because it was product byproduct, country by country. This is the wrong approach. A trade deficit is not about those things and that is not a good way to go about looking at it. The other point i will make is that bilateral trade deficits dont matter. This is like my trade deficit with starbucks which i am not to kill you wried about. Lets go back and think about what the aggregate trade balance is. It means we import more than we export. How can we do that . How can we buy more from the rest of the world and we still more to the rest of the world . Only one reason. We are borrowing. This is why i am saying it has ch more to do with borrowing investment, with with spending and output than it has to do with trade policy. By definition we must be spending more than we are producing if we are running a trade deficit. Currentlydeficit is 500 billion or about 3 of gdp. What are the causes of this . Is fiscal causes policy because we have been running a fiscal deficit. If you really are concerned about the trade balance, it is important to not expand the fiscal deficit because then the government will be absorbing more. It has to come from somewhere. Some of that will come from abroad and it will expand the trade deficit. Fiscal policy is actually super important for the trade balance. Time toappened over cause this trade deficit to rise . Some blame chama. If you look at consumption since the 1980s, consumption of gdp has increased from about 2 to about 68 percent now. People are consuming more. Kind of a good thing. That is the reason we are running a trade imbalance. We are exhorting more than we are producing. We are the result running a trade deficit with the rest of the world. I will say it has something to do with the Exchange Rate as ,ell because the Exchange Rate the real Exchange Rate, is the price of our goods for other goods. Because the dollar is the worlds currency, there have been periods where the dollar is overvalued and there may be currency manipulation by china so that is no longer a problem. Means our exports are more expensive to the rest of the world and imports are cheaper. That can contribute as well. What is missing from this list is trade policy. Increasing a tariff is not going to affect the trade balance unless it is somehow about savings or investment. , itss it is a high tariff is not going to affect savings and investments. We dont know the directions it would take because it could , decrease, or have different effects. Tool isnt about trade policy, but about saving or investment. With aggregates a drag on growth. It is a problem when we are growing slowly and the rest of the world is also glowing growing slowly. Some of our growth is being exported and since trade is heavy in manufacture, industry we continue to lose manufacturing jobs. The biggest culprit for lost jobs are Tech Knowledge he and automation and manufacturing is beenre of employment has in decline since the 1960s. There is no sudden change in that if you look at it. There is also some benefit. We get cheap goods. We have the consumption boom. Financeion to investment, that is good for the u. S. They pay higher wages as well. Good fornvestment is u. S. Growth and jobs. The real concern with the aggregate trade balance isnt the deficit, it is the sustainability over time. Remember, we are borrowing. Every year we are borrowing from abroad and that is adding up. Than i was buying more was earning, i would be accumulating debt. At some point no one will want to lead land to me. That is the concern with running deficits year after year and running the net external deficit position is 45 of gdp in the u. S. We owe a trillion dollars in external debt. It is the highest of any country ever. As a ratio, we are a big country. It is not so bad. My colleagues have a book coming out in the next month on currency conflict and they know that it is around 60 of gdp ountries have problems portugal, greece, or spain passed that before they ran into problems. Problem is sustainability. It is growing debt over time. It is not about trade per se. Let me give you words about the bilateral deficit. Some countries have stuff we need an like, like Starbucks Coffee that i like. Saudi arabia has oil. We will have a trade deficit with saudi arabia. Supply chains are another reason we have deficits. We have a great supply chain where they are part of the components of things we need or assembled products that need parts from and that is something we need in the whole rolled. Germany has a huge trade surplus, but they have tra deficits with their lowcost suppliers like Czech Republic and hungary and so forth and big ones in the auto sector. Car Companies Benefit from cheap benefit fromas we cheap parts from mexico. To wrap up, what should we do . Except the fiscal deficit as a problem if we are worried about accumulating debt over time. We need to rain that in or limit it. There are things we can do to save more. Bradyryan tax plan not a border adjustment border adjustment tax to rein in the tax deficit. That has problems. Thathing to a consumption may help because it encourages saving. It really does not come from anything about it order adjustment tax. Rate, there are things we can do with the Exchange Rate. One proposal by John Williamson and emphasized by my colleague joe gagnon and Fred Bergsten as we mentioned before is to allow intervention in the currency market to balance. What china is doing is supporting their currency while they are running a trade surplus. That is ok. What we dont want to see countries doing is intervening to weaken their currency and running a big surplus. That is not ok. That is another kind of agreement you could imagine. Deficit, theyeral are mostly political. You talk to countries onen one. You hear about u. S. China, u. S. Russia, u. S. Mexico relations. That is the wrong approach. Some countries have things we need. We should focus on the aggregate trade deficit if we are worried at all, but trade policy is not the answer. I will stop there. Hanks thank you very much. Will you pick up the mantle . This may be veal time any of you get to see me on the left. [laughter] did you plan this . I thought you would enjoy being there for a change. Of a dinner i had at the aflcio in any case, i guess my views are very different than the previous speaker. An identity that a trade deficit equal save benefit. One can say we have a trade deficit as we have a saving deficits. I could run causality in the other direction. If i wanted to debunk the Trump Administration, that is what i would do. People are wondering how brexit happened or trump happened. I never endorsed donald trump and i and not here to defend his policies. The was worried about economic bomb, iould certainly make at argument. To focus on my argument, it is true that the current account of the sit has to equal net capital influx. Because we have a current account deficit, we have capital inflows or i could build an argument in either direction and use reasonable economics to accomplish that. In my mind the trade deficit is of result of a combination the Technological Forces driving globalization on one hand and mercantilism and nationalism on the other hand. We have a rulesbased International Trade system which i much admire and feel is sorely threatened. International trade law and i have written about this, and i read books other than those published at my university, is remarkable in that it is the most economically informed aspect of law along with antitrust. It is almost as if the economists were sitting at the feet of the gods being the lawyers that write these documents. And its conceived from the notion that it brings together groups of market economies for the purposes of tradeing comparative advantage. Things like Exchange Rates will adjust to ensure that the outcomes when we teach comparative advantage will indeed happen, that trade will be balanced, that employment will be full, that most importantly that adjustment takes place. When you remove trade barriers workers effectively move from one kind of employment to another maybe with some disruption and requiring some assistance but they are not permanently displaced from the labor force. In reality we have to recognize a couple of things. One is that most of our trade deficit is with china, 60 . Of the balance, germany is important and japan has been important and continues to be. If you solve the trade deficit you probably have solved the problem. To move away from that for a moment, if you have a system thats based on the notion that markets will prevail and that trade will balance out then when you have three of the four largest economies, which constitute more than half of trade, operating on the basis that it is a matter of Public Policy that we should run a trade surplus, that Exchange Rates should be manipulated to that effect. There are a variety of ways to cause an Exchange Rate to be under valued then the system cant work. So we have to look at trade policy among other things to determine why we have a trade deficit. Not just our trade policy, but theirs. It requires fundamentally an open mind about these issues. It causes us to think in ways that are contrary to what we have put up on black boards. I like to tell my colleagues it competition is where children learn about markets. It is a beginning but its not an end. Story is not in the assumptions we make about free trades, but in the violation of the real world and whether they have consequence. All of our models have violation in the real world. The question is, do the violations have consequence . Now, in our case we have had a profound failure to adjust. We have had people who have left the labor force completely for no apparent reason other than they feel discouraged. We have 7 million men between the ages of 25 and 55 unemployed and not looking for work. Alongside of that part of our fiscal deficit finances a program that can imply effective marginal tax rate. Ofect of marginal tax rates 55 for going to work. After all, with obamacare in place, with the Food Stamps Program modified as it has been, a healthy male 25 years of age sitting at home watching espn is eligible for Free Health Care and food stamps and can never have to look for work. It is reminder of some of the Northern European countries and allowing kids to go to school for ever in getting a stipend to do it. Of course that is gone now. We need to talk about specific policies that have effect on behavior. So i am saying that the trade policies have something to do with this deficit and the way we spend our money. That said, the consequences for the trade deficit are profound. The amount is great. I think looking at some magical number is silly simply because we will probably pierce through 60 . The melt down will not happen the way it did in greece because greece cant print money. Greece needs euros to pay its debt. Our debt is denominated in dollars. Our meltdown will come that not private actors but Central Banks dont want to hold our debt because they hold a great deal of it. When the American Public doesnt want to hold it. Thats when well have a problem. We will never have the problem of not being able to come up with currency to pay for it. We can always print it. It will be an issue of when do people demand such high Interest Rates that it makes our federal budget, you know, unsustainable. It throws us into a black hole of a kind we have never seen. We have never seen the principal reserve country go bust. We dont know what it looks like. Summers saying. Every financial crisis has a long period of adjustment. When was the last time we had a financial crisis like 2008 . One must have observations to draw generalizations about the past. I would suggest to you we have no counter intuitive here. We have no other examples. We dont know what its really going to look like. We know probably it will not be nice, that it will take a long time to recover. The immediate effect of people not working is to have a lower gdp. I find it absolutely absurd that we s