How Should EU Trade Balances Be Measured?
Back when I was in Germany I asked a lot of people about Germany’s export-oriented economy and whether that’s something that can or should change in order to correct the global financial imbalances. In general the answer was “no,” with one popular cashing out of that answer being the one Claus Vistesen lays out in great detail here, namely that Germany’s demographic structure makes export-dependency inevitable:
Something I was surprised I didn’t hear more of, but which I think I may take up as my own line on this subject, is that European integration has reached a point where it’s misleading to look at any one country’s balance-of-payments situation in isolation. I assume that there are some American states which, if looked at as individual states, would seem to be in a situation of perpetual imbalance. Washington State, for example, with Microsoft is probably a huge “exporter.” If you look at the Eurozone as a whole, things are perfectly balanced:
Of course at times the Eurozone will be running a surplus and at times a deficit, but looking at that line as a whole nothing whatsoever seems out of order. The next step in the analysis would be to see what happens if you break the United States or China or Japan down into sub-regions and look at their trade balances in isolation. My intuition is that you’d see wild differences from place-to-place comparable to the intra-European differences. But the correct way to look at these four is as two giant markets and two big ones, not as a whole array of medium-sized ones.
16 Responses to “How Should EU Trade Balances Be Measured?”
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October 6th, 2009 at 11:45 am
Is it still true that the world as a whole is running a trade surplus? It’s an obviously erroneous result, but I believe that’s what the statistics said at one time.
October 6th, 2009 at 11:51 am
Speaking as a Washington State resident Microsoft is not what makes us a huge exporter, I don’t even know if licenses to manufacturers are included as ‘exports’. What are definitely included are big old airplanes like 747s and Eastern Washington wheat (almost entirely grown for expert) and tree crops like speciality apples and cherries, and fish huge amounts of which are grown and caught for the Japanese market. Washinton State was a huge net exporter when Bill Gates was still working out of that garage. Of course back then we were also exporting large amounts of timber and lumber, today not quite so much.
October 6th, 2009 at 12:00 pm
As a planet, we have imposed some negative externalities on the rest of the universe by dumping junk in space.
Children are present opportunity costs and future investments, in that they take away time from work in the present but add to the economy later.
Do economists generally take demographics into account when discussing trade balances? Would Sailerites give up that third SUV or six-bedroom McMansion if that’s what it took to keep out young brown men who might want to dance the lambada with their daughters?
Clearly there’s more to the world than economics.
October 6th, 2009 at 12:09 pm
I thought the problem with the trade imbalances was the Chinese were stuck with a ton of extra dollars but couldn’t do anything with them, so they sold a ton of mortgages people didn’t need.
As long as the Eurozone is 0 surplus/deficit in aggregate, then there shouldn’t be a similar problem with their currency. Individual countries shouldn’t have that problem since there are no more D-Marks etc in circulation. Or something.
October 6th, 2009 at 12:33 pm
Actually this is a popular defense of Germany Matt.
Here is Wolfgang Munchau disagreeing with that interpretation:
http://www.ft.com/cms/s/0/d6a4a012-ab91-11de-9be4-00144feabdc0.html
…The second question is how to deal with the eurozone. The eurozone as a whole has been running a small deficit. But there are large cross-country imbalances inside the eurozone. I used to believe that national current account deficits do not matter, but the crisis has demonstrated that political leaders treat the eurozone not as a true economic union but merely as a joint currency area that is comprised of sovereign states. The Germans invoke the eurozone defence when confronted with accusations of excessive current account surpluses, yet when the crisis broke, the policy response was unco-ordinated and nationalistic. By contrast, the French never cease to defend the notion of a eurozone polity, yet they torpedoed a joint eurozone external representation at the International Monetary Fund by insisting that France retain its seat. This is not an honest position. For as long as the Europeans remain confused, it is best to treat imbalances as an issue for countries, not currency areas.
October 6th, 2009 at 12:40 pm
Matt,
Have you read this morning’s titanically important post by Robert Fisk in The Independent? The Gulf States, Brazil, Venezuela at a minimum have all agreed to transfer all sales of oil to a basket of currencies from which the dollar is explicitly excluded by 2018. Since nearly half of our trade deficit comes from the purchase of oil, we are facing an enormous increase in it over the next nine years.
It seems crystal clear that draconian reductions in US hydrocarbon usage is today and forever a central national security imperative. Forget wimpy “cap and trade” half-measures. We need a severe increase in motor fuel taxes now, half dedicated to large increases in transit operating subsidies and bus purchases and half to Social Security and Medicare funding. Some of it can be used for increased rail system construction, but only buses and increases in car pooling can meet the necessity to halve our oil consumption in nine years. In urban areas half of all freeway lanes should be reserved for use by high occupancy vehicles during commute hours in order to incentivize people to carpool.
Global warming will be lessened more by doing this than by the current Waxman-Markey bill.
Such an increase must of course be accompanied by offsetting reductions in employment taxes so the poor aren’t devastated. That’s the reason that half of the money raised should go to trust fund amplification.
We can’t screw around any longer. This is a deadline which is avoidable only by a major war wherein we would have no allies except possibly Britain against China, Japan and Russia who are all major backers of the agreement.
October 6th, 2009 at 12:46 pm
By looking at the Eurozone as a consolidated balance sheet, you are missing a great deal. There were massive capital flows from Germany to Spain, Portugal, and Ireland. The same striking imbalances between the US and China were merely recreated within the Eurozone.
October 6th, 2009 at 12:46 pm
Ah, the FT quote in comment 5 makes this point well.
October 6th, 2009 at 1:01 pm
… Germany’s demographic structure makes export-dependency inevitable
I’ve learned to be suspicious every time Matt puts a graph in a post and this one sends up red flags again.
Just because you can rescale and overlay two time series doesn’t mean they are related. Claus Vistesen admits as much in the original post.
The top graph shows virtually no correlation between median age and trade surplus for the first 27 years (more than half the time span). In fact, I’m pretty sure you could find a strikingly similar result if you used the last 50 years of the global warming “hockey stick” chart instead of Germany’s trade surplus.
So is the median age in Germany correlated to the rise in global temperatures? Maybe. But that doesn’t mean they have anything to do with one another.
October 6th, 2009 at 1:02 pm
@ISLM: When you look at the Eurozone as a consolidated balance sheet you indeed miss quite a great deal. But the same is true for the US, there were also massive capital flows to Florida…
October 6th, 2009 at 1:13 pm
Jinchi is right, a series going from 0% to 8% is completely different from a slight increase in the second variable (37 to 44). It seems Matt is just repeating the talking point fed to him by German business types primarily interested in defending their large export sector.
Although I’m not sure why they bother, since curbing free trade with Germany must be about as popular in DC as mandatory union membership.
October 6th, 2009 at 2:18 pm
Anandakos: “Since nearly half of our trade deficit comes from the purchase of oil, we are facing an enormous increase in it over the next nine years…It seems crystal clear that draconian reductions in US hydrocarbon usage is today and forever a central national security imperative.”
I agree with your whole comment and all the proposed solutions. I would add, though; without changing over our combustion automobile fleet to an electric automobile fleet, we can only hope to make a dent in CO2 emissions, and just as importantly, and hardly reduce our reliance on imported oil at all.
Roughly 50% of America’s oil is imported. Roughly 50% of America’s oil is consumed by trucks and autos. You can see where we would be with an all electric auto fleet. We would no longer need to import oil, and we would cut our oil consumption in half, and cut our trade deficit in half. It is a win, win, win. And an electric auto battery can easily be charged by a small solar panel. Anywhere in the country. No need for coal usage.
China is doing this. By 2020 90% of their automotive fleet be will electric. That means they will no longer need to import oil. China, is thinking National Security. We are not.
October 6th, 2009 at 3:22 pm
” Actually this is a popular defense of Germany Matt. ”
What the hell? Defense? There is no need for a “defense”.
When a country destroys the world financial system and is very desperate to divers from that on the other hand, it might try to divert by attacking other countries based on their own mistakes as a “defense”. Thats true.
October 6th, 2009 at 3:46 pm
To be fair to Vistesen, he does offer far more than the “hey, these two trends are correlated!” caricature being attacked in these comments.
Since the world economy is increasingly multipolar, it makes sense just from an efficiency standpoint to move to accepting payments for oil in multiple currencies, but the deliberate exclusion of the dollar seems an unnecessarily hostile move that may just be a feint, either to try to extract some concession of some sort from the U.S. or to try to get America to be more of a team player in the world.
October 7th, 2009 at 10:01 am
Anadakos –
What currency oil is priced in is irrelevent. The only relevant quantity for the ability of the U.S. to run trade deficits is the desire of foreigners to net save dollars. If that desire goes down, the deficit goes down. But seeing as how there aren’t a whole lot of other regions of the world willing to allow such deficits, I don’t see what else they are going to save in…
October 7th, 2009 at 11:54 am
jimbo,
It’s not irrelevant. The fact that you have to buy oil with dollars means that non-U.S. economies have large stores of dollars to buy oil with. This creates a demand for dollars beyond the demand that is created by people wanting to buy American products, and thereby allows the U.S. to run a larger trade deficit without sinking the dollar.