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Statistics from March surprisingly show a new trade surplus for China. Good news for China and the rest of the world too.

The surprise return to surplus from February’s $31.5 billion deficit confounded expectations that trade would remain $1.3 billion in the red, with a solid 10.4 percent year-on-year bounce in sales to the United States helping exports grow faster than expected, customs data showed on Tuesday.

Imports undershot expectations, growing 5.3 percent on the year in March – consistent with other data suggesting soggy domestic demand in the first quarter of the year – but the trade numbers overall reinforced the view of analysts that China’s trade-sensitive economy is set for a soft landing in 2012.

Like many predicted, foreign demand for Chinese goods has not been hurt very much  by the increased value of the Yuan. The new Chinese trade surplus is being attributed to better growth in the rest of the world, particularly the US.

For skeptics who believe this is not good for the rest of the world, let me try–again– to explain.

The savings that consumers enjoy from buying foreign goods allows them to either save more money or to buy more goods. The savings might turn into better investment opportunities, and more demand for goods might come from either home or abroad.

This is an essential lesson in free-trade economics.


A new story focuses on Argentina’s restrictions on trade, forcing importers to export goods of equal value.

Complaints have been made to the World Trade Organization from the US, the E.U., Japan and 10 other countries.

Argentina’s motivation is to preserve domestic jobs, ignoring the true advantages of real free trade, which accrue to consumers through lower prices and greater demand for both domestic and foreign-made goods.

The irony in all this is that the countries making the complaints are guilty of similar tactics. The most familiar is the US demands that China increase the value of its currency, afraid that it will cost the US more jobs.

After 200 years, people–including politicians–should better understand David Ricardo’s explanation of comparative advantage, where free trade encourages countries to specialize in the production of goods and services that they produce relatively best.

Uwe E. Reinhardt has published a story entitled The Debate on Free Trade Continues. As usual, the debate contrasts the economic view of free trade with the political difficulties that stem from lost jobs and income.

…there are more things in heaven and earth, economist, than are dreamt of in your philosophy.

There certainly is something to that perspective. What often makes an economist’s analysis so sharp and crisp is precisely that it tends to be simplistic and politically naïve…I acknowledge that our case for free trade should never be the end word in a conversation on the subject, but rather a springboard for more discussion.

While I agree that more discussion is never bad, to concede that free trade is sometimes best to avoid seems only an admission that we are wrong about free trade to begin with.

In a nutshell, in that branch of inquiry, economists view the world as a giant cattle farm to be managed in ways that maximize the collective weight of the cattle, totally in abstraction from the welfare of any individual animal. We call the collective weight of the cattle social welfare.

The cattle-farm model then allows us to say, with a straight face, that if a public policy bestows a gain of $2,000 on George but makes Martha $1,000 poorer, social welfare has been increased.

This dictum underlies the economist’s case for free trade. The cattle farm is global. Free-trade analysis pays little attention to the love people have for their own nation, which makes them assign more weight to the welfare of fellow citizens than to that of citizens of other countries.

In fact, free-trade economics shows that both domestic and foreign citizens gain from free trade. What has always made it difficult politically is that we can never be sure what domestic citizens benefit. For example, sacrificing jobs making tires in the US–that brings more jobs to Asia, but it also brings more spending power to Americans–spending that will create new jobs in the US in some industry where we have an advantage over foreign abilities.

But along with my Princeton colleague Alan S. Blinder, I do worry about what the dynamic impact of completely free trade would do to America, especially when some enterprises exhibit strong economies of scale and require longer-term investments, and other nations snub their noses are the rules of free trade.

This is only another concession to politics. If other countries ignore the rewards of truly free trade, of course the US must resist, but never to the level of rejecting free trade as a worthy goal. We already have the World Trade Organization in place to regulate those disputes.

I am actually disappointed that some of my economics colleagues accept concession on the point of free trade. Politics aside, the gains of free trade have made much of the world much better off over the last 50 years, and it can continue if we can manage to stick with good analysis on the topic.

shakeAs I was writing my last post–G20 and free trade–The Christian Science Monitor was publishing an article on virtually the same topic. Theirs though is focused on Obama and his protectionist leanings so far.

… Obama has so far equivocated on free trade, which only sets an example for other nations to resort to protectionism. He did little to keep Congress from putting a “buy American” provision in the giant stimulus bill. And he signed onto a measure that violates NAFTA by barring Mexican trucks in the US.

The article also makes the case that protectionism helped postpone recovery from the Great Depression.

The world has looked to the US for leadership in opening markets since 1945, when American officials cited protectionism as helping prolong the Depression and as a cause for World War II.

It looks like maintaining free trade was a real focus of the G20 summit. Let’s hope Obama is convinced.

g20_gbs_bm_baye_702705gTwo articles this morning coming from the G20 meetings in London. One is about Obama and Chinese premier Hu Jintao agreeing to avoid the pressure for protectionist economic policies.  The other is about the ongoing protests in London (and elsewhere) which are described as being “anti-capitalist.”

Both articles mention that there are likely to be agreements soon about new regulations for finanacial markets, but I am not sure why different countries have to agree on the same regulatory model. Everyone wants to stay competitive with other countries, but they are disagreeing about the scope of regulations needed. I will be a bit surprised if they actually agree on strict and enforceable rules.

Meanwhile, how will these protests affect the ability of leaders to maintain commitments to free trade? At least in the more democratic countries, it seems likely that protectionism will become stronger.

Milton Friedman once wrote that the one thing all economists seem to agree on–free trade–is the one thing the rest of the world seems not to understand. We ought to teach comparative advantage to kids when they are about 12.