US

Trade and Exchange Rates

In May, the US Treasury published a report to Congress on the macroeconomic and foreign exchange policies of major trading partners of the United States. As Stanford economist and former Chicago Booth professor John Cochrane noted on his blog, this made clear reference to the possibility of currency manipulation:

‘Under Section 3004 of the 1988 Act, the Secretary must: “consider whether countries manipulate the rate of exchange between their currency and the United States dollar for purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade.”’

The Treasury report notes that nine countries are now on a ‘Monitoring List’ of major trading partners that account for a large and disproportionate share of the overall US trade deficit. The list comprises China, Japan, Korea, Germany, Italy, Ireland, Singapore, Malaysia, and Vietnam.

In June, the US president followed this up by accusing the president of the European Central Bank of currency manipulation. He tweeted ‘Mario Draghi just announced more stimulus could come, which immediately dropped the Euro against the Dollar, making it unfairly easier for them to compete against the USA. They have been getting away with this for years, along with China and others.’

We invited our US panel to express their views on whether the trade balances between the United States and other countries are indeed the result of policies designed to maintain lower exchange rates against the dollar or otherwise tilt the playing field of global trade.

We asked the experts whether they agreed or disagreed with the following statements, and, if so, how strongly and with what degree of confidence:

(a) Mexico’s persistent bilateral trade surplus with the United States implies that Mexico is following policies that keep the peso artificially weak against the US dollar.

(b) The existence of a multi-year trade deficit of Country A with Country B implies that B has successfully tilted the playing field in its favor in terms of such policies as tariffs, non-tariff barriers, and the exchange rate between them.

Mexico-US trade and exchange rate

Of our 43 experts, 39 participated in this survey, and on the first statement, they were unanimous: weighted by each expert’s confidence in their response, 37% disagreed and 63% strongly disagreed.

Among the short comments that the experts are able to include when they participate in the survey, Larry Samuelson at Yale explained the basic principle: ‘There is no reason to expect bilateral trade balances to match; a surplus may reflect many factors other than an artificially weak currency.’ And his colleague William Nordhaus at Yale noted: ‘Bilateral balances are irrelevant measures for trade position.’

Aaron Edlin at Berkeley and Kenneth Judd at Stanford both made the useful analogy with our day-to-day personal interactions. Edlin said: ‘Not necessarily. I run a persistent trade surplus with my employer. I want their money but not their goods.’ Judd added: ‘Bilateral trade balances mean nothing. I run a very large trade deficit with Safeway, Apple, Walgreens, and many other entities. So what?’

Maurice Obstfeld at Berkeley and Jose Scheinkman at Columbia focused on Mexico. Obstfeld commented: ‘On this theory, the peso would be weak against non-USD currencies too and they would have big surpluses with everyone. They don’t.’ Scheinkman pointed out that: ‘Mexico follows an inflation target. Peso depreciated in part because of Trump’s antics.’

A tilted playing field?

The second statement widened the focus to any bilateral trade relationship and any policies that might seek ‘unfair competitive advantage in international trade’. Weighted by each expert’s confidence in their response, there was near unanimity: 27% disagreed and 72% strongly disagreed with the proposition that a persistent trade deficit reflected a playing field successfully tilted in favor of the surplus country.

Christopher Udry at Northwestern went back to basic principles: ‘The more important reason is that there is absolutely no reason that trade should balance between any two countries in a multilateral world.’ Maurice Obstfeld added; ‘Bilateral imbalances may simply reflect the international specialization of production activities.’

Robert Hall at Stanford said: ‘Wrong – for example, US deficits, aka capital inflows, reflect high investment opportunities here.’ And David Autor at MIT revealed the flaw in this kind of thinking about trade balances: ‘Why does China run persistent surpluses with US but not Germany? Hard to believe currency manipulation can explain both!’

Evidence

In comments on both questions, Pete Klenow at Stanford provided links to related research evidence, noting that ‘ Trade balances reflect saving-investment imbalances and real exchange rates reflect productivity differences (tradable versus non-tradables).’

And Anil Kashyap at Chicago quoted ‘Paul Samuelson: the one proposition in all of the social sciences which is both true and non-trivial is comparative advantage.’

All comments made by the experts are in the full survey results.

Romesh Vaitilingam
@econromesh
June 2019

 

Question A:

Mexico's persistent bilateral trade surplus with the United States implies that Mexico is following policies that keep the peso artificially weak against the US dollar.

Responses weighted by each expert's confidence

Question B:

The existence of a multi-year trade deficit of Country A with Country B implies that B has successfully tilted the playing field in its favor in terms of such policies as tariffs, non-tariff barriers, and the exchange rate between them.

Responses weighted by each expert's confidence

Question A Participant Responses

Participant University Vote Confidence Bio/Vote History
Acemoglu
Daron Acemoglu
MIT
Disagree
4
Bio/Vote History
Alesina
Alberto Alesina
Harvard
Disagree
4
Bio/Vote History
Altonji
Joseph Altonji
Yale
Disagree
8
Bio/Vote History
Auerbach
Alan Auerbach
Berkeley
Strongly Disagree
10
Bio/Vote History
Autor
David Autor
MIT
Disagree
7
Bio/Vote History
No. That's AN explanation -- but not the most likely one
Baicker
Katherine Baicker
University of Chicago
Disagree
3
Bio/Vote History
Banerjee
Abhijit Banerjee
MIT
Strongly Disagree
8
Bio/Vote History
Bertrand
Marianne Bertrand
Chicago
Disagree
6
Bio/Vote History
Brunnermeier
Markus Brunnermeier
Princeton
Disagree
9
Bio/Vote History
Chetty
Raj Chetty
Harvard Did Not Answer Bio/Vote History
Chevalier
Judith Chevalier
Yale Did Not Answer Bio/Vote History
Cutler
David Cutler
Harvard
Disagree
5
Bio/Vote History
Deaton
Angus Deaton
Princeton
Strongly Disagree
7
Bio/Vote History
Duffie
Darrell Duffie
Stanford
Disagree
5
Bio/Vote History
Edlin
Aaron Edlin
Berkeley
Strongly Disagree
8
Bio/Vote History
Not necessarily. I run a persistent trade surplus with my employer. I want their money but not their goods.
Eichengreen
Barry Eichengreen
Berkeley
Strongly Disagree
10
Bio/Vote History
Einav
Liran Einav
Stanford
No Opinion
Bio/Vote History
Fair
Ray Fair
Yale
Strongly Disagree
10
Bio/Vote History
Finkelstein
Amy Finkelstein
MIT Did Not Answer Bio/Vote History
Goolsbee
Austan Goolsbee
Chicago
Strongly Disagree
8
Bio/Vote History
Seriously, do better people
Greenstone
Michael Greenstone
University of Chicago
Disagree
7
Bio/Vote History
Hall
Robert Hall
Stanford
Disagree
3
Bio/Vote History
Macro policy does affect external flows, but lots of other things matter too.
Hart
Oliver Hart
Harvard
Strongly Disagree
8
Bio/Vote History
Holmström
Bengt Holmström
MIT
Strongly Disagree
6
Bio/Vote History
Hoxby
Caroline Hoxby
Stanford Did Not Answer Bio/Vote History
Hoynes
Hilary Hoynes
Berkeley
Disagree
5
Bio/Vote History
Judd
Kenneth Judd
Stanford
Strongly Disagree
8
Bio/Vote History
Bilateral trade balances mean nothing. I run a very large trade deficit with Safeway, Apple, Walgreens, and many other entities. So what?
Kaplan
Steven Kaplan
Chicago Booth
Disagree
6
Bio/Vote History
Kashyap
Anil Kashyap
Chicago Booth
Strongly Disagree
7
Bio/Vote History
Paul Samuelson: the one proposition in all of the social sciences which is both true and non-trivial is comparative advantage
Klenow
Pete Klenow
Stanford
Strongly Disagree
8
Bio/Vote History
Trade balances reflect saving-investment imbalances and real exchange rates reflect productivity differences (tradable vs. nontradables).
-see background information here
Levin
Jonathan Levin
Stanford
Disagree
3
Bio/Vote History
Maskin
Eric Maskin
Harvard
Disagree
7
Bio/Vote History
Nordhaus
William Nordhaus
Yale
Strongly Disagree
9
Bio/Vote History
Bilateral balances are irrelevant measures for trade position.
Obstfeld
Maurice Obstfeld
Berkeley
Strongly Disagree
10
Bio/Vote History
On this theory, the peso would be weak against non-USD currencies too and they would have big surpluses with everyone. They don't.
Saez
Emmanuel Saez
Berkeley
Disagree
4
Bio/Vote History
Samuelson
Larry Samuelson
Yale
Disagree
8
Bio/Vote History
There is no reason to expect bilateral trade balances to match; a surplus may reflect many factors other than an artificially weak currency.
Scheinkman
José Scheinkman
Columbia University
Strongly Disagree
9
Bio/Vote History
Mexico follows an inflation target. Peso depreciated in part because of Trump's antics.
Schmalensee
Richard Schmalensee
MIT
Strongly Disagree
9
Bio/Vote History
Shapiro
Carl Shapiro
Berkeley
Strongly Disagree
9
Bio/Vote History
Shimer
Robert Shimer
University of Chicago
Strongly Disagree
8
Bio/Vote History
Stock
James Stock
Harvard
Disagree
5
Bio/Vote History
Thaler
Richard Thaler
Chicago Booth
Strongly Disagree
5
Bio/Vote History
Udry
Christopher Udry
Northwestern
Strongly Disagree
10
Bio/Vote History
So false.... A trivial reason is provided by the next question.

Question B Participant Responses

Participant University Vote Confidence Bio/Vote History
Acemoglu
Daron Acemoglu
MIT
Disagree
4
Bio/Vote History
Alesina
Alberto Alesina
Harvard
Strongly Disagree
7
Bio/Vote History
Altonji
Joseph Altonji
Yale
Strongly Disagree
8
Bio/Vote History
Auerbach
Alan Auerbach
Berkeley
Strongly Disagree
10
Bio/Vote History
Autor
David Autor
MIT
Strongly Disagree
7
Bio/Vote History
Why does China run persistent surpluses with U.S. but not Germany? Hard to believe currency manipulation can explain both!
Baicker
Katherine Baicker
University of Chicago
Disagree
3
Bio/Vote History
Banerjee
Abhijit Banerjee
MIT
Strongly Disagree
7
Bio/Vote History
Bertrand
Marianne Bertrand
Chicago
Disagree
6
Bio/Vote History
Brunnermeier
Markus Brunnermeier
Princeton
Strongly Disagree
9
Bio/Vote History
Chetty
Raj Chetty
Harvard Did Not Answer Bio/Vote History
Chevalier
Judith Chevalier
Yale Did Not Answer Bio/Vote History
Cutler
David Cutler
Harvard
Disagree
5
Bio/Vote History
Deaton
Angus Deaton
Princeton
Strongly Disagree
7
Bio/Vote History
Duffie
Darrell Duffie
Stanford
Strongly Disagree
7
Bio/Vote History
Edlin
Aaron Edlin
Berkeley
Strongly Disagree
8
Bio/Vote History
Eichengreen
Barry Eichengreen
Berkeley
Strongly Disagree
10
Bio/Vote History
Einav
Liran Einav
Stanford
No Opinion
Bio/Vote History
Fair
Ray Fair
Yale
Strongly Disagree
10
Bio/Vote History
Finkelstein
Amy Finkelstein
MIT Did Not Answer Bio/Vote History
Goolsbee
Austan Goolsbee
Chicago
Strongly Disagree
9
Bio/Vote History
investment > savings = trade deficit
Greenstone
Michael Greenstone
University of Chicago
Disagree
7
Bio/Vote History
Hall
Robert Hall
Stanford
Disagree
7
Bio/Vote History
Wrong--for example, US deficits, aka capital inflows, reflect high investment opportunities here.
Hart
Oliver Hart
Harvard
Strongly Disagree
8
Bio/Vote History
Holmström
Bengt Holmström
MIT
Strongly Disagree
6
Bio/Vote History
Hoxby
Caroline Hoxby
Stanford Did Not Answer Bio/Vote History
Hoynes
Hilary Hoynes
Berkeley
Disagree
5
Bio/Vote History
Judd
Kenneth Judd
Stanford
Strongly Disagree
9
Bio/Vote History
Kaplan
Steven Kaplan
Chicago Booth
Disagree
5
Bio/Vote History
Kashyap
Anil Kashyap
Chicago Booth
Strongly Disagree
7
Bio/Vote History
see the Samuelson quote above
Klenow
Pete Klenow
Stanford
Strongly Disagree
8
Bio/Vote History
Again, trade deficits reflect saving-investment imbalances.
-see background information here
Levin
Jonathan Levin
Stanford
Disagree
5
Bio/Vote History
Maskin
Eric Maskin
Harvard
Disagree
7
Bio/Vote History
Nordhaus
William Nordhaus
Yale
Strongly Disagree
9
Bio/Vote History
Same
Obstfeld
Maurice Obstfeld
Berkeley
Strongly Disagree
10
Bio/Vote History
Bilateral imbalances may simply reflect the international specialization of production activities.
Saez
Emmanuel Saez
Berkeley
Uncertain
3
Bio/Vote History
Samuelson
Larry Samuelson
Yale
Disagree
8
Bio/Vote History
Scheinkman
José Scheinkman
Columbia University
Strongly Disagree
9
Bio/Vote History
Schmalensee
Richard Schmalensee
MIT
Strongly Disagree
9
Bio/Vote History
Shapiro
Carl Shapiro
Berkeley
Strongly Disagree
9
Bio/Vote History
Shimer
Robert Shimer
University of Chicago
Disagree
8
Bio/Vote History
Stock
James Stock
Harvard
Disagree
5
Bio/Vote History
Thaler
Richard Thaler
Chicago Booth
Strongly Disagree
5
Bio/Vote History
Udry
Christopher Udry
Northwestern
Strongly Disagree
10
Bio/Vote History
The more important reason is that there is absolutely no reason that trade should balance between any two countries in a multilateral world.