In Tuesday\u2019s NYT, Oren Cass<\/a> makes the case for protectionism.<\/p>\n It would be wonderful to see economists willing to try a new course when the one they\u2019ve pursued has failed so spectacularly for so long. Instead, they are doubling down on their mistakes.<\/p>\n Their most basic mistake is the continued reliance on the theory of comparative advantage. The theory, a mainstay of Econ 101 courses, says that countries should specialize in what they are relatively more efficient at and then benefit from trading the resulting output. An advanced economy like the United States might lose its textile manufacturing, say, but become the worldwide hub for the production of cutting-edge computer chips.<\/p>\n The theory works great in the classroom, but in reality it wasn\u2019t just T-shirts that ended up going overseas. The most sophisticated industries have left, too. The United States ran consistent trade surpluses in advanced technology products until China joined the World Trade Organization. In 2002, that surplus\u00a0flipped<\/a>\u00a0to a deficit that in 2023\u00a0exceeded<\/a>\u00a0$200 billion, with the United States importing more than $3 of advanced tech products for every $2 it exported.<\/p>\n \u2026<\/p>\n Committed to their discredited framework, economists continue to rely on the models built on it. The Peterson Institute, for instance, uses a model known as G-Cubed to predict that the United States would suffer higher prices, lower incomes and reduced manufacturing output if it withdrew the permanent normal trade relations granted to China in 2000. Economists have been using that model since the 1990s to produce studies guaranteeing that free trade will always work out well for all sides. The Budget Lab at Yale has produced its own negative assessments of Mr. Trump\u2019s proposals using the Global Trade Analysis Project model, which one recent Federal Reserve study warned \u201chad essentially zero predictive accuracy\u201d in its efforts at forecasting results from previous trade deals.<\/p>\n<\/blockquote>\n Cass observes:<\/p>\n U.S.\u00a0industrial output\u00a0has, at best, remained flat since the mid-2000s, and workers in the manufacturing sector have been getting less productive for more than a decade.<\/p>\n<\/blockquote>\n First, a point of fact, industrial production has been flat since the mid-2000s, but not necessarily value added. Here\u2019s a comparison of manufacturing production and manufacturing value added.<\/p>\n Figure 1:<\/strong> Value added in manufacturing (black, left log scale), value added in manufacturing \u2013 annual \u2013 (tan, left log scale), both in bn.Ch.2017$ SAAR, manufacturing production (green, right log scale). NBER defined peak-to-trough recession dates shaded gray. Source: BEA, Federal Reserve via FRED, NBER.<\/em><\/p>\n \u00a0<\/p>\n Second, regarding what models economists should use, I think Mr. Cass should\u2019ve taken more than Econ 101. One of the first things I read when in grad school in international (around 1986 or so) wasF New Trade Theory, which focused on intra-industry trade, which is not<\/em> based comparative advantage (see discussion of Krugman here<\/a>; PA856 slides on monopolistic competition and trade<\/a>; also Chapter 7 from Chinn-Irwin International Economics<\/em><\/a>).<\/p>\n Third, Mr. Cass has focused on the deficit in advanced technology products. Indeed there is a widening deficit, as defined by the Census Bureau. In some circumstances, this could be considered an instance of revealed comparative advantage.<\/p>\n Figure 2:<\/strong> Advanced technology products exports (blue), imports (red), both on log scale. NBER defined peak-to-trough recession dates shaded gray. Source: Census<\/a>, NBER.<\/em><\/p>\n However, three points are useful to keep in mind: (1) imports are c.i.f.; exports are f.a.s.; (2) these are nominal values, and; (3) restrictions have been placed on exports, especially against those going to China (e.g., BIS<\/a>)<\/p>\n In Mr. Cass\u2019s indictment of trade theory, he (or his think tank) links to an argument for balanced trade \u2013 in Rebuilding American Capitalism<\/a>.<\/p>\n Establish a uniform Global Tariff on all imports, set initially at 10% and adjusted automatically each year based on the trade deficit. After any year when the trade deficit has persisted, the tariff would increase by five percentage points for the following year. After any year when trade is in balance or surplus, the tariff would decline by five points the following year.<\/p>\n<\/blockquote>\n Of course, the target of balanced trade (if primary income and remittances quantitatively offset each other, as they do for the US) implies no intertemporal trade, which has clear negative welfare consequences<\/a>.<\/p>\n In any case, it\u2019s anything but clear that raising tariffs can alone zero out the trade deficit, unless they are sufficient to make trade entirely prohibitive (i.e., autarky). That\u2019s because the trade balance (as opposed to the composition of trade) is driven by macro fundamentals, such as those that would be in the IMF macro balance approach \u2014 private saving, investment, and budget balance, demographics \u2014 and these are unlikely to be sufficiently altered to affect the trade deficit substantially (see Boz, Li, Zhang<\/a>).<\/p>\n My plea: don\u2019t criticize a corpus of literature if one isn\u2019t familiar with the literature. (And for goodness\u2019s sake read a textbook!)<\/p>\n<\/p><\/div>\n\n
\n
![\"\"](\"https:\/\/econbrowser.com\/wp-content\/uploads\/2024\/12\/vamfgpix.png\")
<\/a><\/p>\n![\"\"](\"https:\/\/econbrowser.com\/wp-content\/uploads\/2024\/12\/advtechtradepix.png\")
<\/a><\/p>\n\n