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2010-06-07

Political economy of trade, partial economic theories/models and true optimality

Comments on Ronald I. McKinnon “Why exchange rate changes will not correct global trade imbalances”, 5/06/2010, http://www.eastasiaforum.org/2010/06/05/why-exchange-rate-changes-will-not-correct-global-trade-imbalances/
It appears that there are more than one factor working in the issues of trade balances - the elasticity and more fundamentally savings and investment behaviours, as well as various preferences and behaviour inertias, both short and long terms.

So the economic reality is invariantly much more complex than many nice but mostly partial economic theories and models based on certain assumptions and focus on certain aspects of the reality.

The main issues are largely empirical in nature.

The US has tended to run trade deficits for fairly long period of time, with different countries on the other side of the balance from time to time and as its target of trade wars.

The question is not just China with its currency pegged to the $US has trade surplus with the US, but also some other countries whose currencies are free to adjust that also have trade surpluses with the US.

While the US can blame China for fixed exchange rate, how should it blame those other countries?  Which countries should and can the US to blame for its budget deficits over a very long period that is internal in nature? Still external high savings countries?

Besides, bilateral trade balance is not and should not be the benchmark for trade balance in a multi-country trade in the world as it is. To require bilateral trade balance will mean huge losses in global welfare due to losses in trade opportunities.

Further, optimal trade balance even for a country should be over a sufficiently long period and should not mean balance year by year.

But trade is economic as well as political, so people from short term political point of view often selectively quote or use some partial economic theories to their advance their arguments. Even economists sometimes can act either inadvertently or deliberately in that way.

Paul Krugman, a fairly recent Nobel Economics laureate, is an example in this regard. Of course, he is famous for strategic trade theories, after all.

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