What the Edwardians Could Teach Trump About Trade (Wonkish)

Canada yesterday, Japan today: Another bogus trade complaint

I really wasn’t planning to write another trade-related post this weekend, especially after dumping my audio lesson on trade early this morning. But I couldn’t resist following up Trump’s latest trade spat: Telling Prime Minister Shigeru Ishida that Japan must eliminate its trade surplus with the United States.

I guess the campaign to alienate all of our allies continues; more about that on Monday, I hope. Beyond that, however, I think we can do a useful compare-and-contrast between Trump’s new complaint about Japan and his complaints about Canada, which brought us to the brink of a destructive trade war four months days ago. (Hey, the pace of horrible news makes every day feel like a month in better times.)

As a number of people finally caught on, Trump’s complaint that Canada’s trade surplus with the United States was somehow evidence that Canada was exploiting us fell apart as soon as you realized that this surplus was entirely explained by exports of oil from the Athabasca tar sands to the Midwest — a benefit to America, not a cost.

The story of Japan’s surplus is different. But like Canada, Japan is entirely innocent of wrongdoing.

Unlike Canada, Japan has been running significant surpluses on its current account — a broad definition of the trade balance that includes services and investment income:

Source: International Monetary Fund

But that’s OK, because Japan is exactly the kind of country that should be running current account surpluses.

Remember the basic accounting identity:

Current account + Net inflows of capital = 0

A nation that has net outflows of capital — that invests some of its savings abroad — must, as a matter of sheer arithmetic, be running a surplus on current account.

So when should a nation be investing a lot abroad? Well, we want and expect capital to flow from places where it earns a low return to places where it earns a higher return. The classic example is Britain in the decades before World War I. Britain was a mature, already industrialized economy that had already accumulated a lot of capital. It made sense for some of that capital to flow abroad to places that needed it.

To a large extent this involved sending capital to “regions of recent settlement.” What people meant by that, of course, was “recent settlement by white people.” Capital flowed to places where Europeans were moving in, often displacing indigenous people: Canada, Australia, Argentina, southern Brazil and, yes, the United States. But morality aside, the economic logic was clear: These places needed capital for their economic expansion, especially but not only to build railroads.

And so Britain ran very large current account surpluses for decades before World War I:

Source: Bank of England

How does modern Japan fit into this paradigm? Like late Victorian/Edwardian Britain, it’s a mature economy with limited opportunities for domestic investment, above all because of demography: Low fertility and limited immigration have meant a startling decline in Japan’s working age (15-64) population:

Source: OECD

So as I said, Japan is exactly the kind of country that should be running current account surpluses. Claiming that it is doing something wrong, or that America is somehow a victim here, is malicious nonsense.

And pointing this out will, of course, have no impact at all on Trump’s thinking.