that the volume of trade between Kanesh and various trading partners seems to fit a gravity equation: trade between any two regional economies is roughly proportional to the product of their GDPs and inversely related to distance. Neat.
But what does the seemingly universal applicability of the gravity equation tell us?
If you want to grow slightly alarmed about the American future, contemplate not just the scale of our trade deficit with China but the fact that our largest export to them by a wide margin is soybeans.
the U.S. Commerce Department announced it had found “reasonable basis to believe or suspect” that Chinese subsidies of solar panels imported to the U.S. were in violation of international trade agreements.
Do we really need to call trade war when the US has an export surplus in Solar technology?
When Obama brags that “over 1,000 Americans are working today because we stopped a surge in Chinese tires,” he’s implementing a small-scale version of a similar idea. Blocking an influx of cheap Chinese tires does, indeed, preserve jobs for tire-makers. But tire-buyers pay higher prices and presumably curtail their purchases of some other goods or services in exchange. Meanwhile, Chinese tire-makers have lost jobs and are now less likely to buy American soybeans or DVDs of our movies.
This line of thinking swiftly stumbles into self-contradiction. After lambasting companies that “ship jobs overseas,” Obama launched into a feel-good anecdote about how “Siemens opened a gas turbine factory in Charlotte and formed a partnership with Central Piedmont Community College.” Is a politician in Germany giving a speech lambasting Siemens for shipping jobs to the U.S. and complaining, as Obama did, that it’s “not fair when foreign manufacturers have a leg up on ours only because they’re heavily subsidized,” perhaps through partnerships with community colleges.
This is where Obama gets things wrong. You can compete by having poorly paid workers living in dorms working 60 hour weeks with no concern about the health and safety of those workers or you can compete by having workers produce much more value per hour worked. The former is the developing nations model, the later is the developed nation model. Why I think the later is a better idea for the US should be obvious in the same why it is obvious why China picked the former.
If you think about an agricultural economy centered around a cash crop for export—it could be cotton, coffee, or whatever else you like—then realistically locally focused food production is also going to be part of the picture. The cotton farmers need food after all. So you could easily have a situation in which a bunch of farmers are clustered in a village, partially growing vegetables for basically their own consumption and partially growing cotton. In the unfair trade paradigm, children and adults alike grow both cotton and vegetables. Then when you switch to a fair trade paradigm, what you get is labor market segmentation. Maybe children stop working in the export-oriented cotton fields, but now children are doing all the vegetable farming. The household- and village-level economies, however, are still dependent on child labor. This is all just very tricky to deal with unless the country where it’s happening has the state capacity to enact mandatory free public schooling rules and enforce them effectively as a matter of policy.
A government official emphasized to me today what should be clear to anyone who follows Calculated Risk’s charts, namely that a huge element of our trade deficit has nothing to do with China or manufacturing but is instead driven by oil:
Now it’s not unusual that the US is a net oil importer. Most countries are. But America is a much more oil-dependent country than other places are.