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My Mercatus Center colleague Christine McDaniel – a PhD economist who specializes in trade – appeared last Thursday on Fox in a brief debate with trade skeptic Peter Morici [2]. I asked her to respond to Morici’s bizarre and baseless claim that the Heckscher-Ohlin theorem [3] requires ‘balanced trade.’ Here’s Christine’s response:
I was on Fox News the other night with Charles Payne, and Peter Morici claimed that the Heckscher-Ohlin model assumes balanced trade. That claim is incorrect.
Heckscher-Ohlin helps us to better understand observed patterns of exporting and importing: these patterns will reflect relative factor endowments. The Heckscher-Ohlin model says nothing about investment flows and nothing about the trade balance.
In fact, differences among countries in attracting investment funds will lead to some countries running current-account deficits while others will run current-account surpluses.
The Heckscher-Ohlin model’s insight is that the goods and services that a country will specialize in producing and exporting will be goods and services the production of which uses that country’s relatively abundant factors of production.
It remains unclear as to why Morici would point to the Heckscher-Ohlin model since the model does not necessarily support his position. In any event, the model does not assume balanced trade.
More can be found on the Heckscher-Ohlin model in Heckscher-Ohlin Trade Theory, translated, edited, and introduced by H. Flam and J. Flanders, Cambridge, Mass., MIT Press, 1991. See also “The Heckscher-Ohlin Model in Theory and Practice [4],” by Edward Leamer, Princeton University, Feb. 1995.
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Also from Christine – here, in U.S. News & World Report – is this different yet important angle on why Trump’s trade policy is atrocious and absurd [5]. A slice:
Every state has a story. Take Texas [6]. Foreign-owned companies employ 544,800 Texas workers, 5.5 percent of the state’s private workforce. The importance of trade agreements and cooperation is also evident: 62 percent of the state’s exports go to various U.S. free trade agreement partners, and since 2006, Texas exports to these partners have grown by 60 percent.
(I disagree, though – but in a friendly way! – with Christine’s expression that “Trump’s frustration and alarm over Chinese trade policies is understandable.” Christine is here, I think – because she is a kind woman – being overly generous to Trump, whose ‘understanding’ of trade is simply that of an uninformed and economically ignorant mercantilist.)