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Potentially Misleading, but Not Meaningless, Trade Numbers

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Macroblog’s very insightful David Altig [2] corrects me [3] on the facts. Although predominantly a service economy, most of America’s trade, in fact, is in goods. In practice, as David writes in an e-mail to me "the deficit in goods really is a pretty good proxy for the current account deficit — at least for now." The graph in this post [4] is quite clear and worth a look.

Therefore, the Washington Post can be forgiven for reporting [5] America’s trade picture – in this case, with China – only in terms of goods (rather than in goods and services).

Or can it? While today U.S. merchandise-trade figures do proxy well for current-account figures, surely responsible news media should cultivate the habit of reporting figures from the current-account rather than from the merchandise-trade account.  The reasons are two: (1) there’s nothing at all special or ‘better’ or more fundamental about trade in goods as compared to trade in services, and (2) there’s nothing at all to guarantee that services will not become a bigger part of the current-account picture.

Note: quite apart from the question of how well the U.S. merchandise-trade deficit proxies for the U.S. current-account deficit is the question of the meaningfulness of trade-account measures for any one country (say, the U. S.) with another country (say, China).

Any measure of country A’s trade relationship with country B is completely meaningless; it’s useful only for demagoguery.  Even if the U.S. were to have a zero current-account balance with the rest of the world – no current-account deficit or surplus – it would be freakishly coincidental if the U.S. had no current-account deficit with each of several individual countries.

The old-but-wise economists’ example applies here: I routinely shop at supermarkets, but I don’t work at supermarkets. Therefore, my current-account deficit with supermarkets is long-lasting. It will never disappear; indeed, it will grow until the day I die. Ditto for my trade relationship with clothing retailers, dry cleaners, auto producers, restaurants, airlines, computer makers, pharmaceutical companies, pet stores, wineries – the list is endless. My one major ‘trade surplus’ is with my employer, George Mason University, which buys far more from me than I buy from it. (Incidentally, my trade surplus with GMU is in services. I produce and sell no manufactured goods.)

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