The reverse flow of trade surplus in real goods is capital flow. Therefore accumulating a trade surplus means exactly accumulating ownership of other peoples means of production (or your own back from them), and a deficit means the reverse. (see also fears of capital flight)
If means of production are on average good to have, then everyone wants a trade surplus.
It might also be reverse driven.
That is to say, blockers to economic growth and blockers of trade surpluses can often be the same things, and so the policies correlate.
I disagree with Eliezer when he says that countries with surpluses never cash them in, which is kind of part of the core of his argument.
(Equity) Billionaires live lavish lifestyles, even though they never sell their equity. Doing so would give up their power. Instead they borrow for cheap (c.f. " buy, borrow, die"). I wonder which countries typically can borrow money very cheap. Maybe Japan, or Germany...?
He just looks at a single number, and then utters "these numbers don't make sense". Well of course.
Look at the whole picture instead.
There are many ways of cashing in, without running a compensating deficit, even when only looking at money, and not at other things like political, social etc. power.
Literally macroeconomics 101. Trade surpluses aren't shipping goods for free. There is a whole balance of payments to consider. I'm shocked EY could get that so wrong, surprised that lsusr is so ready to agree, and confused because surely I missed something huge here, right?
I think different people are using the word "free" to mean slightly different things, and that the distinctions about which words we use to describe things in this case is confusing, but unimportant. The same goes for the stuff about cashing in payments.
Yeah, this is all macroeconomics 101. I wrote this because macroeconomics 101 is counter-intuitive. When I originally saved macroeconomics 101 into my brain, I was basically just memorizing a set of conclusions. This post is me going into those cached thoughts, ripping them up, and replacing them with better ones.
The core question I'm trying to answer is "Why do countries subsidize exports? Derive the answer from first principles."
Well please do derive it then, because to me it seems you just focused on one aspect and then concluded that that aspect definitely is the correct answer.
If the goal was to reward the best and the brightest, then why does china make some of them disappear from time to time? Why reeducate the odd billionaire who misbehaves? The idea was to get him in power because he knows better and generates riches, no?
On giving away stuff for 'free': what would be good examples in your opinion? Steel? Silicon or finished solar cells? Electric cars and batteries? Masks useful during pandemics?
Seriously?
I agree with you on the network effects and winner takes all mechanics. But to me that is not related at all to exports and their subsidies. Just making good stuff at a reasonable price is enough. If desired, production can be subsidized, sure, but that has positive effects in your country as well. Chinese people own lots of real estate, top of the line electronics and electric cars, more so than we do.
The reason Chinese individuals have increasing quality of life, seems to be far more because they manufacture things cheaply than any sort of cashing in they do.
They cash in politically.
Imagine some middle eastern oil and money rich country going abroad to help develop a subsaharan economy to help them extract their resources. Imagine china doing the same. Who will have more success?
I agree they do, I just doubt that's more than a tiny percentage of the reason Chinese individuals are far better off than they were 50 years ago, and I think they fact they manufacture things cheaply is large percentage of why they're better off.
I don't understand Eliezer's explanation. Imagine Alice is hard-working and Bob is lazy. Then Alice can make goods and sell them to Bob. Half the money she'll spend on having fun, the other half she'll save. In this situation she's rich and has a trade surplus, but the other parts of the explanation - different productivity between different parts of Alice (?) and inability to judge her own work fairly (?) - don't seem to be present.
It doesn't work at that small of a scale. More generally, this principle doesn't work on any scale too small to support an international industrial economy. It wouldn't even work for trade between different tribes of farmers. This is a phenomenon that you only see at very large scales of human behavior. You need massive coordination failures colliding with each other for these ideas to kick in.
This is simply incorrect, (both your and Eliezer's explanations) and shows a misunderstanding of basic macroeconomics that would be taught at an intro-level university course.
When countries run a trade surplus--positive net exports--there mechanically must be a net inflow of capital. When I export goods and services, foreign buyers need to exchange their currency for the domestic currency to purchase those exports. This causes the domestic currency to appreciate, which puts downward pressure on domestic real interest rates relative to other countries. Businesses in the exporter's country are thus able to invest more heavily in capital goods, raising their productivity and increasing long-term GDP growth.
For a thorough treatment, Mankiw's textbook is a good resource: http://students.aiu.edu/submissions/profiles/resources/onlineBook/T9D9B4_Principles_of_Economics-_7th_Edition.pdf
This mechanism is covered in Chapter 31.
Why then does it make sense to subsidize exports? That's the core of the question I'm trying to answer. Because paying money to subsidize exports costs a government money, which puts upward pressure on domestic real interest rates.
Because we don't only care about the net effect of trade policy, we also care about other factors like the distribution of benefits and the unemployment rate. Especially during a recession or periods of high joblessness and income inequality, subsidizing exports may be necessary to stimulate economic activity among a particular demographic or in a specific region. And during economic downturns, a stronger domestic currency is not always a good thing. I'll just quote Mankiw here, discussing export subsidies during a depression:
A weaker dollar means that our goods are cheaper relative to foreign goods. That stimulates our exports and reduces our imports. Higher net exports raise domestic production and employment. Foreign goods are more expensive, but more Americans are working. Given the desperate need for jobs, on net we are almost surely better off with a weaker dollar for a while.
The original tweets seem at least partially tongue-in-cheek? Trade has lots of benefits that don't depend on the net balance. If Country A buys $10B of goods from Country B and sells $9B of other goods to country B, that is $19B of positive-sum transactions between individual entities in each country, presumably with all sorts of positive externalities and implications about your economy.
The fact that the net flow is $1B in one direction or the other just doesn't matter too much. Having a large trade surplus (or large trade deficit) is a proxy for generally doing lots of trading and industry, which will tend to correlate with a lot of other things that made or will make you wealthy. But it would be weird if a country could get rich solely by running a trade surplus, while somehow avoiding reaping any of the other usual benefits of trading. "Paying other countries to discern your peoples' ability to produce" is plausibly a benefit that you get from a trade surplus even if you try hard to avoid all the others, though.
I agree that one of the benefits of exports as a metric for nation states is that it's a way of showing that real value is being created, in ways that cannot be easily distorted. Domestic consumers also do this, but can be distorted. I disagree with other things.
China is the classic example of a trade surplus resulting from subsidies, and it seems to be mostly subsidizing production, some consumption, and not subsidizing exports. The US subsidizes many things, but mostly production and consumption.
If China and the US were in a competition to run the largest trade surplus, then I would expect the surplus to fluctuate more based on changes in US and China policy. Electing a US government that cared more about the surplus, relative to other factors, and was more competent, should lead to changes. There are shifts over time, but they don't make sense in those terms.
Countries have switched from trade surpluses to deficits. Japan seems like a clean example - it had a solid trade surplus and now fluctuates. This coincides with an aging population that wants to "cash in its excess trade tokens", or at least live off the returns they generate. It also coincides with Fukushima making it harder to run a surplus.
Do you believe running a trade surplus causes a country to be wealthier? If so, how do we know that?
Yes. This is sufficiently well-established and uncontroversial, that I don't feel the need to dig through the specific examples.
Ok. It's strange, then, that wikipedia does not say this. On the contrary, it says:
The notion that bilateral trade deficits are per se detrimental to the respective national economies is overwhelmingly rejected by trade experts and economists.[2][3][4][5]
(This doesn't necessarily contradict your claim, but it would be misleading for the article to say this but not mention a consensus view that trade surpluses are beneficial.)
I guess I should qualify my statement, since this post is about surplusses based on value-added business like manufacturing and technology. A trade surplus based on resource extraction is not necessarily a source of long-term wealth.
I agree with the statement "The notion that bilateral trade deficits are per se detrimental to the respective national economies is overwhelmingly rejected by trade experts and economists.", by the way. The key word is "bilateral". Consider the China-Australia example I used in my original post. China has a bilateral trade deficit with Australia, but that's misleading because China imports raw material from Australia and exports manufactured goods to many other nations. In this way, China's bilateral trade deficit with Australia is one component of a net trade surplus. once you account for all the other countries China trade with.
This is simply false. See e.g. https://en.wikipedia.org/wiki/List_of_countries_by_trade-to-GDP_ratio
The country with the highest GDP-adjusted export/import ratio is... Gabon. Then Qatar, Bermuda, Cambodia, Turkmenistan, and Libya. Norway is sandwiched between Congo and Azerbaijan. Zimbabwe ekes out a lead over the US. Luxembourg, the country with the highest GDP per capita, is right below Kuwait.
You are spreading misinformation. The impact of trade balances on GDP growth is an incredibly controversial topic among academic economists.
USA is the world government from a money perspective. They can simply tax the world by printing dollars and sending them overseas.
Any lesson learned about decifits/surpluses from the US is suspect.
China's Belt and Road Initiative /New Silk Road means owning parts of other countries is a terminal value.
Other countries mostly have net neutral imports/exports if I remember correctly.
The way you get rich in an economy is by producing more valuable things and trading for what you want and storing surplus currency (dollars at the world stage).
At times you need to give away your labor so as to start participating and get access, but you need to be getting stuff back to get richer in real terms.
No different than individuals in standard economies
Trade surpluses are weird. I noticed this when I originally learned about them. Then I forgot this anomaly until…sigh…Eliezer Yudkowsky pointed it out.
Eliezer is, as usual, correct. In this post, I will spend 800+ words explaining what he did in 44.
A trade surplus is what happens when a country exports more than it imports. For example, China imports more from Australia than Australia imports from China. Australia therefore has a trade surplus with China. Equivalently, China has a trade deficit with Australia.
In our modern era, every country wants trade surpluses and wants to avoid trade deficits. To recklessly oversimplify, having trade surplusses means you're winning at global trade, and having trade deficits means you're losing. This must be be looked at in context, however. For example, China imports raw materials from Australia which it turns into manufactured products and then sells to other countries. Because of this, China's trade deficit with Australia is part of a system that produces a net trade surplus for China, after factoring in its other trade relations.
What's weird about this? In our modern era, every rich country in the world got that way by (basically) making things of value and sending them to strangers far away. How weird is that‽ To recklessly simplify once again: Before the current liberal international order of global trade relations, the way nations got rich was by sending armies abroad and forcing strangers to send their valuable things as tribute and taxes. That's a so much more obvious method of getting rich. Now we've got reverse empire where the most powerful nations try to subsidize their own exports. They spend money to make it cheaper to create things of value and send these things to their competitors. This isn't even altruism at work. It's the competitive equilibrium created by cutthroat competition.
What is going on here? Isn't it better to charge higher prices for your products? Don't you want other people to send you their valuable things? Relative to market equilibrium, a subsidy is (at net) basically just giving away value for free. And when a government subsidizes exports, that extra value goes to strangers outside of its borders.
There are many roads to wealth, but the most powerful one tends to be owning the means of production. From the perspective of a country, then means having sovereignty over the means of production. In the past, when production was mostly agriculture, "having sovereignty over the means of production" meant conquering the most arable land. During the industrial revolution, manufacturing grew to eclipse agriculture. Production was no longer distributed according to geography. A factory complex can be built anywhere. More importantly, a factory only needs to be built in one place, once. After that, you build more factories next to existing factories, because that's where the workers, suppliers, purchasers, and so on are. That makes factories different from farms. Farms must be built everywhere, to cover all arable land. Factories are built in a small number of relatively tiny industrial centers.
My model of what happened is that centers of economic production tend to have powerful network effects. A few cities dominate the entire world. What city is the biggest manufacturer in the world? Shanghai, followed by several other Chinese cities.
This dynamic isn't unique to factories. It's true of other industries too, like entertainment. The USA dominates cinema. Only a few other countries are even in the running. Japan dominates animation. Software is so concentrated that a single city, San Francisco, dominates the world. It doesn't matter how many copies of Windows Microsoft gave away for free. All that mattered was that Windows became the standard while Microsoft remained solvent. Similarly, the bulk of a rich country's wealth comes from having sovereignty over one or more centers of global economic production.
As technology advances, extreme power tends to get concentrated in smaller number of winners. However, the various different things you can be a "winner" at gets more varied. There wasn't a big market for catalytic converters back in 1715 AD.
My model of trade surpluses is that value is fungible, and that the bulk of value production has strong network effects. Nations get rich by owning a global center of economic production. Sometimes countries manage to create one of these centers directly, but the incentives are so warped that government intervention is usually counterproductive. (For example, the Indian government crippled its computer software industry because they were trying to create a domestic computer hardware industry, which they also failed at.) Exports, however, are difficult for governments to fake. If a country has an export surplus, then it's probably a center of global production. This correlation is strong enough that it makes for a robust optimization target. That's why, in practice, a government policy "subsidize exporters" rewards the people creating value better than "subsidize production" does.
…which is a longwinded way of saying what Eliezer said in his original tweet.