Knowing and Making

Michael Shuman at Curious Capitalist asks a bizarre question: Is the iPhone bad for the American economy? His careful analysis shows that the iPhone has a finely balanced effect on the US trade deficit. It makes a negative impact if the internal components exported from America are valued at their manufacturing cost, and the assembled iPhones coming back from China are valued at full price. But if you count the design and assembly expertise as a US export, the impact is positive. Fascinating. But completely irrelevant to the question he asks. To see this, simply ask if the iPhone is bad for the British economy? Or how about this: is copper bad for the British economy? Whether a product is made, mined, designed or assembled in a country is almost irrelevant to whether it's a good thing. Our lives are very much better with copper in them, even though there's a big trade deficit in copper for most countries outside of Chile. And for the same reason, of course  the iPhone...

I don't have time to write a detailed post today so let me do something slightly unfair by picking holes in somebody else's. Stephanie Flanders writes about (among other things) the risk to UK exports posed by the slowing eurozone economy. Germany seems to have had no growth at all, the Italian economy shrank by another 0.2%, and Spain by 0.1%. Between them, those three countries accounted for 15% of UK exports in 2008. Sounds terrible. But wait, there is a little bit of good news to partly make up for it: British exports to China were 53% higher last month than in January 2009. But they start from a very, very low base: just 2% of our exports went to China in 2008. In total, about 12% went to the Brics - with about 75% going to advanced economies, primarily the the US and the EU. Solid growth in Europe is a necessary condition for a healthy recovery in the UK. So the latest weak numbers from across the channel have given the MPC one more reason to keep the door to further...

Paul Mason points out that world trade (more precisely exports from the developed world) is down by 40% on an annualised basis. We can imagine rational reasons for people to trade less with each other - for example an increased desire for saving reduces the resources available to devote to the slightly risky activity of exchanging with distant parties. But what appears at first sight not to be rational is the distinction between local and foreign trade. Trade within the UK, for example, is certainly not down by 40%. Of course the idea of "trade" within a country is not a very well-defined concept - one could perhaps look at interstate trade in the US, but I assume that such data is not collected comprehensively. But if we generalise to the idea of economic exchange in general, then GDP is essentially the measure we are looking for. And GDP, of course, has not fallen by 40% or anywhere close. So why has international trade fallen so much more? There are several proximate reas...

From the FT:  Acrimony dashes Doha hopes : Normally, the closing session of the forum displays ritualistic expectation that the trade round will be completed in the coming year, but there was little such optimism in 2009. From the BBC:  Ministers promise 2009 trade deal Trade ministers from 24 countries have pledged that they will agree a new world trade deal by the end of 2009...most of these talks in previous years ended with similarly optimistic statements Huh?

Greg Mankiw is not in favour of a "Buy American" clause in the expected US fiscal stimulus package. I don't like protectionist rules myself, and normally you wouldn't find many economists arguing for them. But I have a feeling now that we might see support among some economists for variations of this "Buy American" rule. For example, a condition that spending can go only to countries that have also passed a major fiscal stimulus package. This might just come from people feeling peeved at Germany. It might come from instinctive protectionists finding a respectable way to get their point across. It might come from strong Keynesians who are worried about the damage to the fiscal multiplier from propensity-to-import. It may be unfair to him, but I predict that Paul Krugman may be a flagbearer for this argument. He has just won a Nobel Prize for his New Trade Theory work, which argued (among other things) that some protectionist policies might be justified if th...