1/10
In this very good article Peter Goodman argues that there all sorts of "friend-shoring" and "near-shoring" reasons for American businesses to shift offshore production from countries like China to countries like Mexico.
nytimes.com
In this very good article Peter Goodman argues that there all sorts of "friend-shoring" and "near-shoring" reasons for American businesses to shift offshore production from countries like China to countries like Mexico.
nytimes.com
2/10
Goodman is right, but I would argue that there is a stronger economic reason for Washington to encourage switching production from countries with large-persistent trade surpluses to countries, like Mexico, with balanced trade, or even trade deficits.
Goodman is right, but I would argue that there is a stronger economic reason for Washington to encourage switching production from countries with large-persistent trade surpluses to countries, like Mexico, with balanced trade, or even trade deficits.
3/10
That's because doing so actually increases global demand. it also increases direct and indirect US exports in line with any increase in US imports.
This is because of the radically different ways in which China and Mexico effectively recycle export revenues.
That's because doing so actually increases global demand. it also increases direct and indirect US exports in line with any increase in US imports.
This is because of the radically different ways in which China and Mexico effectively recycle export revenues.
4/10
Because wages and household income comprise a higher share of Mexican output, when an American business shifts production to Mexico, this will likely increase US imports from Mexico.
But, perhaps counterintuitively, it won't cause the US trade deficit to rise.
Because wages and household income comprise a higher share of Mexican output, when an American business shifts production to Mexico, this will likely increase US imports from Mexico.
But, perhaps counterintuitively, it won't cause the US trade deficit to rise.
5/10
That's because as Mexican exports rise, export revenues are distributed in such a way that Mexican consumption and investment rise fast enough that Mexican imports rise just as fast, or even faster, than the increase in exports.
carnegieendowment.org
That's because as Mexican exports rise, export revenues are distributed in such a way that Mexican consumption and investment rise fast enough that Mexican imports rise just as fast, or even faster, than the increase in exports.
carnegieendowment.org
6/10
Mexican export revenues, in other words, are converted into imports, and while only some of these imports might come directly from the US, because trade must balance globally, in the end total US exports will rise by as much (or more than) the increase in US imports.
Mexican export revenues, in other words, are converted into imports, and while only some of these imports might come directly from the US, because trade must balance globally, in the end total US exports will rise by as much (or more than) the increase in US imports.
7/10
This is not what happens when a US business relocates to a trade surplus country. In that case because their workers receive a much lower share of what they produce, and their businesses a higher share, part of the country's export revenues are converted into savings.
This is not what happens when a US business relocates to a trade surplus country. In that case because their workers receive a much lower share of what they produce, and their businesses a higher share, part of the country's export revenues are converted into savings.
8/10
These savings are exported abroad, and because the world has excess savings, they end up representing a net reduction in the amount of global demand caused by the shifting or production from the US to a country that runs persistent trade surpluses.
These savings are exported abroad, and because the world has excess savings, they end up representing a net reduction in the amount of global demand caused by the shifting or production from the US to a country that runs persistent trade surpluses.
9/10
In a well functioning global trading regime, shifting production abroad is part of the process by which countries specialize in comparative advantage. In that case more US imports would simply mean more US exports of higher-quality US production.
In a well functioning global trading regime, shifting production abroad is part of the process by which countries specialize in comparative advantage. In that case more US imports would simply mean more US exports of higher-quality US production.
10/10
But that's not how our global trading regime works. Countries that succeed in weakening domestic demand are rewarded with rising trade surpluses, and these represent a contraction in global demand that ultimately prevents US exports from balancing US imports.
But that's not how our global trading regime works. Countries that succeed in weakening domestic demand are rewarded with rising trade surpluses, and these represent a contraction in global demand that ultimately prevents US exports from balancing US imports.
In response to this thread I've been asked several times why countries that convert export revenues into savings don't boost global demand by funding additional investment.
carnegieendowment.org
carnegieendowment.org
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