Re: Trade Surpluses and Unemployment

[BMCFARLING@xxxxxxxxxxxxxx]

[9 paragraphs, ~1.5 pages]

On Fri, 01 Jul 1994 05:12:05 -0600, Eigo Murakami referred to the
hypothesis that trade surplus countries export unemployment to trade
deficit countries, and Japan's MITI attempting to present an argument to
the contrary based in part on cross-sectional and trend analysis of the
correlation between unemployment rates and trade balances.
----------------
NOTE: Regretfully, I cannot quote Eigo's post properly, since the VAX/VMS
system on which I am receiving this mail truncates text unless there is a
hard carriage return at least every 256 characters; Eigo sent his text in a
format which is likely more useful in the DOS/Macintosh/Unix world, with
carriage returns at the end of each paragraph.
----------------
     First, it may help to clarify the argument regarding the "export of
unemployment". (This is dangerous, since there may be more than one; I take
this from Paul Davidson's writings as well as Keynes' work at Bretton
Woods.) The comparison is with the case of the country exporting the same
amount as it does under its trade surplus regime, and importing an
additional amount of produced goods and services sufficient to maintain a
balance on the current or trade accounts.
     The argument is straightforward: (1) overall, a nation's international
financial accounts must balance (leaving aside IMF Special Drawing Rights),
so that a trade surplus is reflected in either an expansion of official
balances, or in a capital accounts deficit (net purchases of foreign real
and financial assets, including pruchase of debt instruments) or both. To
simplify discussion, I will assume no net withdrawals (+ or -) from
official accounts, in which case the surplus is balanced by a deficit in
net capital inflows. But bying assets, in particular debt instruments and
title to existing property, does not generate substantial employment, while
the alternative, balancing the trade account itself by buying additional
produced goods or services, does produce employment. Changing points of
view to the trade deficit nation, negative net exports have a
contractionary effect, which if the economy is not at full capacity implies
additional unemployment.

Now, we hear that MITI has disproved that this is a valid argument with
statistical evidence. However, the funny thing about statistics facts are
that we want them to tell us what is going on, but unless we know what is
going on, we cannot interpret the statistics. Eigo raises three potential
criticisms of the MITI evidence.
     First, the argument above is that the trade surplus leads to
additional unemployment relative to balanced trade. Cross sectional
difference in unemployment rates are due to a wide variety of factors,
including how unemployment is counted. However, the argument above does not
let us conclude that trade deficit countries will have less unemployment
than trade surplus; so cross-sectional correlations between unemployment
and trade accounts are entirely beside the point. In other words, Eigo's
point number one is right on target. Look instead to the relative
importance of trade surpluses as a percentage of international trade, and
unemployment rates in the deficit countries. This can be done with the same
sources that Eigo cites.
     The second point is that expanding economies tend to run current
account deficits and at the same time expansion reduces unemployment, so
the time series correlation is picking up an entirely different cause-
effect relationship. Again, right on target. The point of the argument is
that this is an international financial constraint on the expansion of
economies even where excess capacity may permit even greater expansion.
Again, to establish that this doesn't happen, one should provide evidence
that, for example, as trade surpluses become more important in
international trade, NAIRU levels (Non-Inflation Accelerating Rate of
Unemployment) do not increase. But of course, they have increased, which is
why MITI didn't cite this kind of evidence.
     On the above argument, the third argument, about using imports
productively, is not on target. The point of Keynes' argument for
discouraging trade account surpluses, and discouraging the building up of
official reserves in particular, is the comparison with an alternative
where nations import up to their level of exports. If the nations which are
presently trade surplus countries expand imports to balance trade, this
releives the current account deficit of trade deficit nations and improves
their abillity to purchase productive imports.

I hope this helps, and heartily applaud Eigo's contribution to pkt. I had
been entriely unaware that MITI was training their statistics to do tricks
to try to maintain support for their policy position!

Virtually,

Bruce McFarling, Pellissippi State
bmcfarling@xxxxxxxxxxxxxx (through July 1)