By Andrea Terzi
In the U.S. and (particularly) in euro countries, policies aimed at stimulating exports are (sadly) considered an effective response to lagging growth (U.S.) and recession (Euroland). Viewing a net export balance (i.e., an international trade surplus) as an economic virtue and a growth engine is a relic of Mercantilism that has had a powerful comeback, not coincidentally, with the abandonment of fiscal policy as a counter-cyclical tool.
The following is an illustration of the view that prevailed in the times before the neo-mercantilist revival.
Back in the 1940s, it was common to consider real living standards to be the sum of home production (i.e., GDP) minus any output sold abroad (exports) and plus any output sent from abroad (imports). The table below is reproduced from Keynes’s Collected Works (Volume 27) and had been produced by the Economic Section of the War Cabinet to study how Britain could afford an increase of living standards as compared with the pre-war period.
The index in the last column measures the change in living standards, where living standards are quantified by the volume of output available for use in the nation. This, in turn, is calculated by taking “home production” and then subtracting the exports to obtain “retained home production” and adding the imports.
The simple fact that exports represent the use of domestic resources for the production of output that will benefit foreigners has become (oddly) contentious. Perhaps, it is because of a mistaken belief that accepting that exports are a cost to the nation (and thus lower a nation’s standard of living) means that national policies should turn against exports to prevent a nation from losing any output that it worked so hard to obtain, and should aim at a trade deficit instead.
In fact, the implication of fully acknowledging that exports are a cost (and imports a benefit) is that a net export position (i.e., exports exceeding imports) is a costly one, and one that policy-makers can only justify against well-defined benefits.
How policy should consider exports (as opposed to net exports) is a question that depends on the broader context, such as the one that prevailed when Keynes was advising the Treasury during World War II. Although he was fully aware that exports reduce the nation’s living standards, Keynes claimed that “export industries must have the first claim on our attention” and that “until we have rebuilt our export trade to its former dimensions, we must be prepared to any reasonable sacrifice in the interests of exports.” Britain was then running a significant trade deficit, as exports had shrunk due to enemy action and diversion of production capacity to war production. Britain’s demand for imports, however, was high, and it could be met through a desire of foreigners to net save in pounds, or an increase in Britain’s exports. Alternatively, Britain would have to accept a weaker pound.
Lacking the foreign private sector’s desire to save in pounds (no longer backed by gold), Britain avoided devaluation thanks to the U.S. Lend-Lease Act, and (after the war) an American loan that provided the dollars to support the pound.
Concurrently, Keynes advised the Treasury that “Britain must produce enough exports to pay for what we require to import from overseas.” Far from aiming at an export-driven growth through repression of domestic consumption, Keynes saw the cost of exports offset by the benefit of providing the means to get the desired imports, while avoiding devaluation.
In other words, Keynes saw exports as a cost that is only worth if it is balanced by some perceived benefits.
How does this all matter for today’s growth policies?
A popular view of the crisis in the eurozone is that it is a balance of payments crisis caused by the growing gap in competitiveness between core and periphery countries. This view is equally used to validate austerity-based national policies repressing domestic consumption, as well as pleas for leaving the euro to regain competitiveness through currency depreciation.
This view is based on two (unwarranted) concerns. The first is that a rise in net exports is the best strategy for getting out of recession. This is obviously not true, as fiscal policy is an alternative (and more effective) solution. Yet, the attempt to use exports to drive demand is functional to the refusal to use fiscal expansion.
The second is that trade deficit countries face an unsustainable growing foreign debt. The reality is that all a trade deficit entails is an increased stock of currency-denominated savings held abroad. When this stock happens to be greater than desired, the currency will depreciate. Unless the country specifically negotiates a loan (like Britain in the 1940s), no increase in foreign debt is needed to match the trade deficit.
Rather, trade surpluses (not deficits) need to be funded. In Euroland, for example, the trade surpluses of core countries have been funded by bank loans, and ultimately government deficits of peripheral countries.
Dr. Terzi is a Professor of Economics and coordinator of the Mecpoc Project at Franklin College Switzerland. He has focused his research interest on macroeconomics, monetary theory, central banking operations and financial market behavior.
This post was originally published at Mecpoc, a forum for alternative views in economics.