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Wednesday, May 31, 2017

On The US-Germany Imbalance

Paul Krugman:

On The US-Germany Imbalance: Trump’s tweet on German-US trade was, it goes without saying, deeply stupid and destructive. He obviously doesn’t get how the EU works – it’s a customs union, so there is no such thing as bilateral trade policy. He also thinks that bilateral trade balances are the test of fairness, which is all wrong. Somewhat annoyingly, there is a real issue lurking behind all of this: Germany’s excessive overall surplus, the consequence of inadequate spending and reflation in the aftermath of the euro crisis. But insulting a key ally on obviously fallacious grounds is no way to help with that issue.
But never mind all that. I found myself wondering about the causes of the underlying fact: Germany does indeed have a huge bilateral surplus with the US, exporting about 2.5 times as much to us as we sell in return. ... Why?
Somewhat surprisingly, there’s not a lot of economic literature on the causes of bilateral trade imbalances. Davis and Weinstein (DW) had a nice empirical examination, which concluded that the standard explanations didn’t explain much, that overall there was a lot more imbalance in the world than there “should” be. Still, I think it’s interesting (although maybe not important) to ask what we can say...
As DW say, one theory of imbalances is macroeconomic: countries that save more than they invest will run surpluses... And that’s certainly part of the story. ...
The other story DW tell is about “triangular trade.” .... [explains] ...
But wait, there’s more. I suspect that part of the US-Germany bilateral imbalance is an optical illusion, brought on by transshipment... [explains] ...
Again, the policy relevance is basically nil. But it might be a good idea to have more research on bilateral trade imbalances, if only to make dissing Trump tweets even easier.

    Posted by on Wednesday, May 31, 2017 at 11:49 AM in Economics, International Trade | Permalink  Comments (23)


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