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 Richmans' Trade and Taxes Blog

Global Trade down 9% since 2014
Howard Richman, 5/25/2016

Robert Romano, writing on Net Right Daily, Americans for Limited Government's website, reports that global trade is down about 9% since 2014. He begins:

Global trade is collapsing. In March, the U.S. trade deficit took a big hit, dropping 13.8 percent amid an $8 billion contraction in imports and a $2 billion shrinking of exports, according to data compiled by the U.S. Census Bureau.

Most economists think that global trade collapses during global economic recessions due to the fact that countries often raise their tariff rates during those recessions. But the causation is different. First trade becomes imbalanced. Then the trade deficit countries get into financial problems and can no longer buy as many imports from the trade surplus countries. Then trade collapses and world growth stagnates. Finally, trade deficit countries impose balancing-trade tariffs upon the products of the trade surplus countries which allows them to get out of the recession. So the economic recession itself causes both the decline in world trade and the rising tariffs.

We are not the first economists to understand that imbalanced trade leads to global economic slowdowns. We attributed that understanding to John Maynard Keynes in our journal article about our Scaled Tariff when we wrote:

During the 1940s, John Maynard Keynes tried to establish a world trade system based upon balanced trade. Volume 25 of his collected writings (Keynes, 1980) is full of his plans for the institution that would regulate the world economy after World War II. Both the IMF and the WTO were founded, partly based upon Keynes' advice. But the institution that Keynes would have created would have required that trade surplus countries take down their trade barriers while letting trade deficit countries use export subsidies, import restrictions, and tariff barriers to bring trade into balance.

Keynes had anticipated that there would be a huge growth in world trade after World War II and wanted to insure that it would be balanced, so that it could continue to grow. He realized that imbalanced trade eventually leads to financial crises in the trade deficit countries, such as the financial crises that engulfed the United States, Greece, Portugal and Spain beginning in 2008. 

There is a similar phenomena apparent in the climate change research. When the global climate warms, carbon dioxide increases. The first scientists who observed this correlation thought that the increase in carbon dioxide caused the global warming. But then climate scientists discovered that the global warming occurs first, which causes the oceans to give off carbon dioxide. 

In order to tease out causes and effects, it is necessary to tease out the order in which the events occur. In the case of global depressions, first comes the collapse in world trade and the depression. Then countries raise their tariff rates. Those trade deficit countries that raise their tariffs the highest, grow the fastest. In fact, that is the story of the Great Depression. The trade deficit countries of Europe, including Britain and Germany, raised their tariff rates in 1934 and quickly exited the depression. The United States was the China (the chief trade surplus country) of that day.