Hadas: The real trade-surplus problem is financial

LONDON (Reuters Breakingviews) - Trade surpluses are supposedly a menace. Donald Trump cites America’s deficits with China, Germany and Mexico as reasons to totally rewrite the rules of trade. But why, exactly, are surpluses a problem? After all, for those toiling away outside the dismal sciences, they might even sound like a good idea.

A container ship departs Burrard Inlet in Vancouver, British Columbia March 6, 2009. REUTERS/Andy Clark

The people of Germany are not obviously feeling much pain from their 2016 current-account surplus of 9 percent of GDP. Nor are South Koreans clearly suffering from their country’s 7 percent surplus. True, if these countries’ excess of exports over imports were smaller, the citizens would be consuming more. But the Germans are rich already. And Korean incomes continue to rise - if unevenly.

Besides, the surplus funds don’t disappear into thin air. They’re stored in global financial assets which are ultimately owned by Germans and Koreans – and the Dutch, Swedes and residents of other surplus countries. The assets may lose some value, if share prices or exchange rates fall or if debtors default. Even with these risks, international investment is a good way to fund the pensions of these lands’ aging populations.

The trade surpluses have to be matched by trade deficits. The long-term economic case against these debts is stronger. Eventually foreign trading partners might stop allowing imports without accepting exports of the same value. The economic shock from credit withdrawal can be painful. Between 2008 and 2015 the Greek current-account deficit fell to zero from 15 percent of GDP. That elimination played a big role in the country’s 40 percent drop in per capita output.

But in the short term, trade deficits almost always allow consumption to be higher than production, and they can bring in more helpful foreign investment than balanced trade would. It sounds a lot like a free lunch. It certainly felt like one in Greece for many years.

Economists’ dark view of trade surpluses is not primarily based on the creation of deficits. They have several other complaints, which vary along with their explanations of the cause of the surplus.

So when the relative lack of German imports is thought to come from an excessive desire to save, the nation is caricatured as overly parsimonious. When the cause is supposed to be skimpy wage increases which hold down spending, German caution or a Teutonic export fetish is called to account.

Other economists see the trade surplus as the result of a national desire to invest overseas. They chastise a hostile domestic business environment. And critics of the European Central Bank or of German fiscal policy are certain that monetary or fiscal mistakes keep German trade from doing what it is supposed to – create jobs by adding to the demand for non-German goods and services.

The explanations and the criticism have a common moralistic theme. Surpluses are supposed to show a lack of the virtue most praised by the followers of economist John Maynard Keynes – always consuming just up to the boundary of imprudence. In the Keynesian world view, surplus countries fail to contribute to the fight against the great economic evil of leaving productive capacity unused.

Well, maybe. The Keynesian sin certainly can be a real problem. Inadequate demand, relative to potential output, was obvious when he wrote about the Great Depression. It was a genuine issue during the most recent recession after the 2008 financial crisis. In both cases, the cure involved a lot of government spending.

But the situation is far less clear right now. Persistent high unemployment rates might conceivably be a sign of the sort of global economic slack which could be tightened by lower trade surpluses, because that would generate higher exports for trading partners. However, the case is doubtful. Great Britain and the United States both run fairly large trade deficits and already have fairly low unemployment rates.

The real problem with today’s trade imbalances probably isn’t Keynesian. It’s financial. The euros, pounds and dollars which Germany, Korea et al accumulate inevitably land in the global financial system. There would be no problem - only gains all round - if these monies funded valuable infrastructure, productive factories and other assets which can generate a reasonable economic return.

Too often, though, the extra currency winds up supporting counterproductive finance. It backs ultimately ruinous property speculation, lends support to chronically weak governments, encourages unsustainable consumer spending and destabilises developing economies, not to mention enriching banks and bankers and stimulating corruption. A typical example: the recycled dollars from the U.S. trade deficit helped fund the American housing bubble whose pop created the 2008 crisis.

If the problem with surpluses is financial-system incompetence, then the right solution is to increase competence. Regulation can do more than strengthen bank capital ratios. It can reform the system, so trade surplus funds are not directed to economically counterproductive uses. That will be tough, both politically and practically. But it should be easier – and will be far more helpful – to solidify finance than to try to change the national characters of Germany or Korea.


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