Friday class, Friday graph of the day: Trade

Mike Smitka

Krugman (co-author of Krugman & Wells, our Economics 102 textbook) won his Nobel Prize for work in international trade, but his "open economy" chapter remains at the end of the book. That textbook structure dates back to the first true "principles" text in 1947, written by Paul Samuelson (another Nobel laureate, and a co-founder with Heckscher and Ohlin of modern trade theory). Since then all successful new texts chose to market themselves as potential replacements, which is realistic only if they are close to what econ profs were already using. We do not see product differentiation! But that's a topic for Econ 243 (Economics of Strategy / Industrial Organization) and not Econ 102.

In 1947 trade was insignificant – Western Europe and Japan were still in ashes, China was descending into civil war while the Iron Curtain shut off Eastern Europe. Samuelson tacked on trade at the end of the book, and remains there in most books 70 years later. As Marc Levinson makes clear in An Extraordinary Time, our course supplement, the structural shift came only with the rise of OPEC and the first oil crisis, which put money into the hands of OPEC, who soon became significant importers. It is also the era when the GATT process was starting to have an impact (the Kennedy Round was signed in 1967, the Tokyo Round in 1979) while containerization was making it easier to move goods. And at the micro level it marked the point where Europe and Japan were high enough in income to matter as markets, and had caught up in an array of technologies (particularly in differentiated products such as motor vehicles) that let them also become exporters. For example, US imports were at the 5% level into the 1970s, first hit 10% in 1979, and 15% in 2004 – and were still at 15% in Q2 of 2017.

Later this term the class will turn its attention to trade balances, returning to the [accounting identity] savings-investment framework we've already developed: (S - I) + (T - G) ≡ (X - M). That framework will, with the addition of theory, help us understand why a macroeconomically significant trade deficit only opened up in the mid 1980s, why it shrank going into the 1990s, and why it then again expanded and has remained that way. One key element: ours will be a macroeconomic story, one in which "competitiveness" is not the issue.