Impact of trade deficits on the u. S. Economy hosted by Washington International trade association. This is about an hour and a half. Good morning, thank you for joining us. My name is kenneth levinsohn, i and the executive rector of the washington trade association. We are delighted so many of you braved the elements to be her today. But come also to our friends watching on cspan. Todays events follows a series we have had on the current trade agenda. We addressed the border withtment tax and trade china and the trade law toolbox. All of those all of those are available on our website, americastradepolicy. Com. All of our content as well, where we are looking at the future of trade anwill be hosting a series of events looking at things like new technologies such as 3d printing, intelligent vehicles, and the impact those would have on trade. We could not have time it much better trade last night the pre deficits and today he will issue an executive order on trade deficits. Tos our mission is educate about trade policy. We cannot package be happier than to have todays Panel Moderated by our friends and investor peter argyle. Have a discussion among the panelists and open it up for questions. Peter . Think you very much can. Thank you all who successfully braved the rain today. We have a very timely discussion topic today. It is at the very heart of the debate currently about u. S. Trade policy. We are very fortunate to have three recognized experts in this area of trade policy economic policy. You have files on them with details. Briefly to my left ear is rob cofounderhairman and of sonic, llc, a Consulting Firm specializing in economics, risk, and economic policy. He is also at the Georgetown University school of business, and previously served as undersecretary of commerce for economic affairs. His epidemic academic credentials include a phd in economics from harvard. In the middle is carolyn floyd, senior fellow at the Peterson Institute for interNational Economics. She has previous experience with the world bank, the imf, fed also has a phd in economics from columbia. To the far left in terms of at the smith school of business. Your but the smith effect. I do not know whether peter will reveal that are not. He has been there at the Business School for many years. Before that he was the director of economics at the International Trade commission. He also has a phd in economics from the State University of new york at albany. Lets start by defining what we are talking about. Parts to the trade balance. Theres merchandise trade, manufactures and raw materials, trade,re is services kingsway financial services, express delivery, computerrelated services, entertainment services, and so forth. Last year, the u. S. Ran a merchandise trade deficit of approximately 750 billion. The Services Trade surplus of about 250 billion. Basically we had a quote, trade deficit of 500 billion. That trade deficit was not the largest on record. 20002016, we had six years and which merchandise trade deficits was higher than last year and we had 10 years in which it was lower. We had trade merchandise deficits continuously since 1976. The Services Trade surplus of record,r also was not a it was the third highest surplus that we had had in services. We had a serces trade surplus continuously since 1971. In the current political discussion, people who talk about trade deficits are talking about theerchandise trade deficit. Fyi, our largest merchandise trade deficit for 2016 were with , mexico,pan, germany ireland, vietnam, and italy. If you want to do anything about the trade deficit, cut back on your pasta intake. [laughter] our largest merchandise export mexico chinaanada japan u. K. Germany and korea. Love the countries with whom we have the largest merchandise trade deficits are also countries that are our largest merchandise export markets. The current debate about trade deficits has been framed by the Trump Administration by their assertion that trade deficits are very important and damaging to the u. S. Economy because they indicate jobs that have been lost by overseas countries, foreign countries, largely because of unfair trade practices. We want to look into this issue of the trade deficit and how it relates to trade policy, how it ultimately relates to other factors. Their speakers present initial comments, i ask them to coider three questions. One, what are the principal reasons for the trade deficit . Overall and bilaterally. We be, w worried should about the continuing merchandise trade deficit, or its current size . Third, what if anything should the u. S. Do about its trade deficit . Go first. Arolyn to mike is yours. Thank you. Its a pleasure to be here. I was planning to walk down here from the petern institute and pick up a copy coffee at stbucks, but instead find coffee here, so my bilateral deficit was starbucks has now improved a little bit. It would have gotten worse if i thought that coffee. Instead i came here and had one. Although because of the rain i tookn uber here, so now my bilateral deficit with uber has expanded. Im not really worried about either of these because fortunately i have a surplus with my employers, they keep paying me for my services. At this point in my life im saving. Im not really worried about these. This relates to the points i will make today. A focus on two things. One that it is the aggregate trade balance we should be worried about, unlike the fiscal balance which is all about fiscal policy, the trade balance actually has almost nothing to do with trade policy. Fiscal policy than with trade policy. That is 1. Im going to make. Trade balance is not about trade policy. This has me really concerned when i saw the point in the list they are going to be looking into for what we should be doing about the trade deficit because it was product byproduct, country by country. This is the wrong approach. A trade deficit is not about those things and that is not a good way to go about looking at it. The other point i will make is that bilateral trade deficits dont matter. This is like my trade deficit with starbucks which i am not to kill you wried about. Lets go back and think about what the aggregate trade balance is. It means we import more than we export. How can we do that . How can we buy more from the rest of the world and we still more to the rest of the world . Only one reason. We are borrowing. This is why i am saying it has ch more to do with borrowing investment, with with spending and output than it has to do with trade policy. By definition we must be spending more than we are producing if we are running a trade deficit. Currentlydeficit is 500 billion or about 3 of gdp. What are the causes of this . Is fiscal causes policy because we have been running a fiscal deficit. If you really are concerned about the trade balance, it is important to not expand the fiscal deficit because then the government will be absorbing more. It has to come from somewhere. Some of that will come from abroad and it will expand the trade deficit. Fiscal policy is actually super important for the trade balance. Time toappened over cause this trade deficit to rise . Some blame chama. If you look at consumption since the 1980s, consumption of gdp has increased from about 2 to about 68 percent now. People are consuming more. Kind of a good thing. That is the reason we are running a trade imbalance. We are exhorting more than we are producing. We are the result running a trade deficit with the rest of the world. I will say it has something to do with the Exchange Rate as ,ell because the Exchange Rate the real Exchange Rate, is the price of our goods for other goods. Because the dollar is the worlds currency, there have been periods where the dollar is overvalued and there may be currency manipulation by china so that is no longer a problem. Means our exports are more expensive to the rest of the world and imports are cheaper. That can contribute as well. What is missing from this list is trade policy. Increasing a tariff is not going to affect the trade balance unless it is somehow about savings or investment. , itss it is a high tariff is not going to affect savings and investments. We dont know the directions it would take because it could , decrease, or have different effects. Tool isnt about trade policy, but about saving or investment. With aggregates a drag on growth. It is a problem when we are growing slowly and the rest of the world is also glowing growing slowly. Some of our growth is being exported and since trade is heavy in manufacture, industry we continue to lose manufacturing jobs. The biggest culprit for lost jobs are Tech Knowledge he and automation and manufacturing is beenre of employment has in decline since the 1960s. There is no sudden change in that if you look at it. There is also some benefit. We get cheap goods. We have the consumption boom. Financeion to investment, that is good for the u. S. They pay higher wages as well. Good fornvestment is u. S. Growth and jobs. The real concern with the aggregate trade balance isnt the deficit, it is the sustainability over time. Remember, we are borrowing. Every year we are borrowing from abroad and that is adding up. Than i was buying more was earning, i would be accumulating debt. At some point no one will want to lead land to me. That is the concern with running deficits year after year and running the net external deficit position is 45 of gdp in the u. S. We owe a trillion dollars in external debt. It is the highest of any country ever. As a ratio, we are a big country. It is not so bad. My colleagues have a book coming out in the next month on currency conflict and they know that it is around 60 of gdp ountries have problems portugal, greece, or spain passed that before they ran into problems. Problem is sustainability. It is growing debt over time. It is not about trade per se. Let me give you words about the bilateral deficit. Some countries have stuff we need an like, like Starbucks Coffee that i like. Saudi arabia has oil. We will have a trade deficit with saudi arabia. Supply chains are another reason we have deficits. We have a great supply chain where they are part of the components of things we need or assembled products that need parts from and that is something we need in the whole rolled. Germany has a huge trade surplus, but they have tra deficits with their lowcost suppliers like Czech Republic and hungary and so forth and big ones in the auto sector. Car Companies Benefit from cheap benefit fromas we cheap parts from mexico. To wrap up, what should we do . Except the fiscal deficit as a problem if we are worried about accumulating debt over time. We need to rain that in or limit it. There are things we can do to save more. Bradyryan tax plan not a border adjustment border adjustment tax to rein in the tax deficit. That has problems. Thathing to a consumption may help because it encourages saving. It really does not come from anything about it order adjustment tax. Rate, there are things we can do with the Exchange Rate. One proposal by John Williamson and emphasized by my colleague joe gagnon and Fred Bergsten as we mentioned before is to allow intervention in the currency market to balance. What china is doing is supporting their currency while they are running a trade surplus. That is ok. What we dont want to see countries doing is intervening to weaken their currency and running a big surplus. That is not ok. That is another kind of agreement you could imagine. Deficit, theyeral are mostly political. You talk to countries onen one. You hear about u. S. China, u. S. Russia, u. S. Mexico relations. That is the wrong approach. Some countries have things we need. We should focus on the aggregate trade deficit if we are worried at all, but trade policy is not the answer. I will stop there. Hanks thank you very much. Will you pick up the mantle . This may be veal time any of you get to see me on the left. [laughter] did you plan this . I thought you would enjoy being there for a change. Of a dinner i had at the aflcio in any case, i guess my views are very different than the previous speaker. An identity that a trade deficit equal save benefit. One can say we have a trade deficit as we have a saving deficits. I could run causality in the other direction. If i wanted to debunk the Trump Administration, that is what i would do. People are wondering how brexit happened or trump happened. I never endorsed donald trump and i and not here to defend his policies. The was worried about economic bomb, iould certainly make at argument. To focus on my argument, it is true that the current account of the sit has to equal net capital influx. Because we have a current account deficit, we have capital inflows or i could build an argument in either direction and use reasonable economics to accomplish that. In my mind the trade deficit is of result of a combination the Technological Forces driving globalization on one hand and mercantilism and nationalism on the other hand. We have a rulesbased International Trade system which i much admire and feel is sorely threatened. International trade law and i have written about this, and i read books other than those published at my university, is remarkable in that it is the most economically informed aspect of law along with antitrust. It is almost as if the economists were sitting at the feet of the gods being the lawyers that write these documents. And its conceived from the notion that it brings together groups of market economies for the purposes of tradeing comparative advantage. Things like Exchange Rates will adjust to ensure that the outcomes when we teach comparative advantage will indeed happen, that trade will be balanced, that employment will be full, that most importantly that adjustment takes place. When you remove trade barriers workers effectively move from one kind of employment to another maybe with some disruption and requiring some assistance but they are not permanently displaced from the labor force. In reality we have to recognize a couple of things. One is that most of our trade deficit is with china, 60 . Of the balance, germany is important and japan has been important and continues to be. If you solve the trade deficit you probably have solved the problem. To move away from that for a moment, if you have a system thats based on the notion that markets will prevail and that trade will balance out then when you have three of the four largest economies, which constitute more than half of trade, operating on the basis that it is a matter of Public Policy that we should run a trade surplus, that Exchange Rates should be manipulated to that effect. There are a variety of ways to cause an Exchange Rate to be under valued then the system cant work. So we have to look at trade policy among other things to determine why we have a trade deficit. Not just our trade policy, but theirs. It requires fundamentally an open mind about these issues. It causes us to think in ways that are contrary to what we have put up on black boards. I like to tell my colleagues it competition is where children learn about markets. It is a beginning but its not an end. Story is not in the assumptions we make about free trades, but in the violation of the real world and whether they have consequence. All of our models have violation in the real world. The question is, do the violations have consequence . Now, in our case we have had a profound failure to adjust. We have had people who have left the labor force completely for no apparent reason other than they feel discouraged. We have 7 million men between the ages of 25 and 55 unemployed and not looking for work. Alongside of that part of our fiscal deficit finances a program that can imply effective marginal tax rate. Ofect of marginal tax rates 55 for going to work. After all, with obamacare in place, with the Food Stamps Program modified as it has been, a healthy male 25 years of age sitting at home watching espn is eligible for Free Health Care and food stamps and can never have to look for work. It is reminder of some of the Northern European countries and allowing kids to go to school for ever in getting a stipend to do it. Of course that is gone now. We need to talk about specific policies that have effect on behavior. So i am saying that the trade policies have something to do with this deficit and the way we spend our money. That said, the consequences for the trade deficit are profound. The amount is great. I think looking at some magical number is silly simply because we will probably pierce through 60 . The melt down will not happen the way it did in greece because greece cant print money. Greece needs euros to pay its debt. Our debt is denominated in dollars. Our meltdown will come that not private actors but Central Banks dont want to hold our debt because they hold a great deal of it. When the American Public doesnt want to hold it. Thats when well have a problem. We will never have the problem of not being able to come up with currency to pay for it. We can always print it. It will be an issue of when do people demand such high Interest Rates that it makes our federal budget, you know, unsustainable. It throws us into a black hole of a kind we have never seen. We have never seen the principal reserve country go bust. We dont know what it looks like. Summers saying. Every financial crisis has a long period of adjustment. When was the last time we had a financial crisis like 2008 . One must have observations to draw generalizations about the past. I would suggest to you we have no counter intuitive here. We have no other examples. We dont know what its really going to look like. We know probably it will not be nice, that it will take a long time to recover. The immediate effect of people not working is to have a lower gdp. I find it absolutely absurd that we shouldnt expect if we resolved our trade deafficit not to have more manufacturing jobs. Well, we know in manufacturing and import industries that workers are more productive than they are in domestic disputes. This is an observation in other economies. We would have more aggregate demand. More would stop watching espn and go to work. How many would deal with how we dealt with social programs . It takes a powerful incentive to get one of these guys off the couch. If those were removed, they might get off the couch more easily. Shifting employment would raise gdp and most of the manufacturing, a good deal is done by manufacturing activities. Now, i would point out that a lot of it has followed American Manufacturing abroad in response to trade barriers. For example, consider the situation in china. A good way is to promise to move more activity over there. It just happened with apple. To not enforce foreign corrupt practices. I would be very eager if i could actually get the Justice Department to do what i wanted to be at least investigating the emails on that. The people that get people like General Motors in trouble is somebody getting passed up and so on and so forth. Now, how do we get out of this mess . Gdp we have been growing at 2 a year. To say its due to productivity growth is to not ask the basic question. Why has productivity growth gotten so much smaller . Does it having something to do with trade deficit . I think it does have something to do with the contraction of manufacturing. I think it does. I find it ridiculous when i hear arguments from northwestern that say all of the good stuff has been invented. I guess he has not been reading about robotics rid and then there is the great then what one. Would you rather have, this, you know, or a flushed toilet. Im old enough to have used an outhouse. Id rather use this. I can keep an outhouse and use this. This makes me so much more productive and provides me with so much more freedom of movement during the day. I dont have to be near a telephone all of the time and so on and so forth. Remember that woody allen movie were he pays a character to call his office to tell him where he will be at every 15 minutes and diane keaton said you forgot the tell him about the payphone youll be passing down the street. Thats what my life was like. I dont work at just a large institution. I work at a mega institution which means i work alone. I was always telling people where they could find me. I think we need a grand bargain on Exchange Rates. We had one before. This time a grand bargain on Exchange Rates would have to include china. China is not going to play by the rules on this sort of thing. I dont think a grand bargain is possible. That would help us get out of this mess. So it does come back to what trump talked about during the campaign. I would also point out that romney talked about the very same things when he was campaigning, but didnt attract quite the same ridicule. Lets face it, donald was kind of a hard guy to like. He is not very politically correct. There is Something Else going on. We are now at a moment in time where people say that universities are becoming closed spaces with closed minds. That is indeed happening. The economics profession is not even willing to cast doubt on what they have been prescribing for the last 50 years because of events like brexit and trump. They dont want to open their mines. To me it is the greatest barrier to finding a solution. We are going to have to deal with china very different ways than say please sign this agreement and comply by these rules because it simply wont happen. Thank you. Thank you, peter. I must admit, i never expected we would be talking about the relationship between outhouses and productivity today. I dont quite understand the connection with the trade deficit, but im sure well get here today. No. No. Ok. Rob. Thank you very much. Thank you to wita and my good and old friend kim leavenson for inviting me. Do trade deficits matter . Thats easy. The answer is yes and no. Whats harder is the precise ways extent and conditions under which trade deficits do and do not matter. Let me dispose of two of peters non sequiturs. First of all, trade deficit is not about poor people and whether we provide health care for them. Let me also say that we have had about 20 financial crises since 1975. Yes, we have a rich data set to understand how advanced economies respond to financial crises, to defend larry, who is an old classmate of mine. A trade deficit or surplus is simple. As in medicine, here we should focus on the underlying policies. For example, a trade deficit can be a symptom of quite positive developments. Similarly it allows us to consume more than we produce including more investment. When it happens with full employment and strong productivity arising trade imbalance presents no downside. That was my regular narrative when i used to announce the Monthly Trade figures which is to say the Monthly Trade deaf it figures in the midst of the longest boom in American History when i was under secretary of commerce. Under other conditions arising trade deficit signals negative development. It may signal the companies are falling behind their foreign counter parts. More commonly the negative effects arise by financing. We have to pay for our imparts. Imports. When we import more than we export we have to pay the net toference by selling dollars purchase the currencies of the foreign producers because that is the currency they want to receive payment in. That leaves Foreign Companies with dollars they can only spend here. They can use them to buy stocks, real estate and other financial aspects. The negative here is those Foreign Investors take home the Capital Gains they earn from their investments here. More immediately, however, those foreign purchases also increase our supply of capital, which in turn tends to lower or interest rate. As an economic matter the capitol flows indicates in jobs. Certainly it would be better to finance those additional investments. We would be worse off if they didnt happen at all. An untutored president slapped tariffs on those with trade surplus with us. It usually focuses on jobs, not on growth and investment. Trade certainly cost some jobs especially jobs between economically desperate companies. It is opposed to trade deficits or surpluses between the United States and other advanced countries. Jobs are lost at companies that are least competitive with foreign producers. Usually in industries that can operate it is cig thif cantly operate in countries at sick difficulty less cost. Thats why it happens in trade between disparate types of economies. Thats what offshoreing is all about. When trump and his and our ace and his allies announced tradeto sit announced deficits, we should remember more than half of u. S. Imports are what are called related party imports. Thats when a company here imports parts or goods from its own foreign subsidiary. It is a transfer within the company. It is half of our imports. It is also 30 of our experts. They involve transfers in the other direction between u. S. And Foreign Parent Companies here. Trade also creates jobs that operate here at less cost or Higher Quality than elsewhere. So trade moves jobs here as well as investment. From industries that are not comepetitive to those where we are cost competitive like advance manufacturing and many services. Inevitably these developments cost some americans their jobs. We should help them with greater access to the means to retrain and if necessary relocate. We can do that without undermining our strength as the worlds most open economy. Lets briefly consider how many manufacturing jobs have been lost to the scale of manufacturing jobs lost to global trade. One famous study found our trade imbalance with china from 1991 to 2011 cost 2 million jobs, including one million in manufacturing. Today 12. 4 million americans are employeed in manufacturing. Thats 10 of all private employees. Add another million and it rises to 10. 8 . 1960s when to the 25 of employees worked in manufacturing or the 1970s when they made up 20 of workers. Deficitsals that trade have had little to do with most of the decline in u. S. Manufacturing jobs since manufacturing wash manufacturings large decline happened when we are running trade surpluses, not trade deficits. There is no direct relationship between trade deficits and peoples incomes or living standards. From 1965 to 2000, manufacturing 25 tof gdp fell from 16 while real per capita double d. Rising productivity relays on workers skill. Promotes higher productivity in at least three ways. First it shifts capital and jobs to more productive uses. Second, it provides access to the best ideas developed abroad, which we can use and some times improve on. The iphone that peter held up is an example of an sfri where the u. S. Is now the world leader. We didnt invent the cell phone, the commercial cell phone. Finns did. We took their goods and improved them. Lastly, trade puts Competitive Pressure on u. S. Companies to innovate and become more efficient. I want to close for a minute by thinking about trade deficits in a more general way. The trade deficit is how much we consume by how much we produce. So a countrys trade deficit arises from that countrys own saving investment and assumption behavior and not from the hartariff policies of other countries. The terror policies or currency policies of other policies or currency policies of other countries. Those policies do effect our trade deficit we fefected especially those that concern Exchange Rates. Since countries change in their own and everyone else wash currencies, policies that affect the relative value of those currencies, that is there. Xchange rate, matter policies that effect the relative value of those currencies, that is their Exchange Rates, matter. It is said hours reflects chinas program to keep it under value relative to the dollar. They have little, if any, impact on the saving of americans and thats what determined our trade deficit. In any case, we saw that two decades of currency manipulation by china had only a marginal effect, even on the share of manufacturing jobs in our economy. In the end, my best counsel is to remember one thing. Trade is not an adversarial phenomenon. It involves voluntary exchanges. No one forces anyone to trade with anyone. People trade and it only occurs with both sides benefit. So let it happen. Allgeier thank you very much to our panel. Well open it up for questions in a little bit. Id like to continue the discussion among the panelists. You know, for most people, getting lost in the details of the balance of payment statements isnt what theyre worried about. What they want to know is do trade deficits go with less employment and less Economic Growth in the United States . So i mean, rob, you had said when you were undersecretary and putting out the Monthly Trade deficit figures, it was in the midst of an economic boom. What does Economic Research and history tell us about relationship between trade deficits and Economic Growth or trade deficits and overall employment . Anybody who wants to. Freund i was going to say that recently i tweeted a picture of u. S. Growth and u. S. Trade deficits and the correlation is close to zero. Not significant. And exactly for the reason that was stated, that in really good times, you have high demand and you might import a lot. You might even be importing intermediates to go into production to help you be more efficient. In good times you run trade deficits and they help to slow your growth so you dont overeheat. During bad times when youre running trade deficits, there may be some cost. We do need to recognize that. It is a drag on growth. But over the long history, there is no correlation between growth and the trade deficit. Morici mr. Shapiro lets just think about our own lifetimes, or the lifetimes of the older ones in this room, like me. You know, we had the lowest unemployment and the strongest growth in the last 60 years, in the 1960s and 1990s. In the we were running trade thes surpluses and in 1990s we were running trade deficits. Which just is an illustration of carolines point. Its not to say that there arent elements underlying trade deficits or surpluses that affect growth. Of course there are. But they work in both directions. As i pointed out for example, the trade deficit increases the supply of capital in the United States, which in turn, lowers or interest rate, which in turn tends to increase growth. We know there are some negative effects on growth. There are also positive. In economics almost all phenomenon work in both directions. Mr. Morici i think that the notion that weve had a lot of growth with trade deficits and poor growth with trade deficits and the reverse and so on and so forth, only illustrates my original argument that we have a lot of identities and its easy to grab an identity and then draw an arrow in one direction or another. With regard to the most recent trade deficits we have to look at how markets function and how political entities have responded to those markets. In recent years, with chinas entry into the wto, and increased imports from china, people have been displaced. I dont think anybody can deny that people have lost jobs because of increased imports. The question is what happens to them. Many have dropped out of the labor force. Or their successors who would have taken those jobs have not participated in the labor force or to the same degree. Thats a labor market adjustment problem. Now, we also have to consider out Government Entities have responded. Theres been a substantial increase in the safety net to assist those people. And although the government has tried its hands at training them, it hasnt been very successful. If we have a situation where we have more imports. People lose their jobs, but they dont adjust, you are going to reduce the Gross National product and you are going to reduce growth. I didnt shake my head while you were speaking, i was kind enough not to do that. Thank you. I understand its hard to have an open mind about this. Its very difficult for me, when you realize that i wrote a book called making free trade work for the council on Foreign Relations and its how i became a tenured professor. But i have to recognize that some of these things havent worked out as they should. If i was sitting on a panel with trumpsters id be taking a different approach. For example, it doesnt warm the cockles of my heart theyre taking aim at mexico. In my view, the trade deficit with mexico has a lot to do with the mexicans doing smart things. For example, they had developed a network of trade agreements with other Major Trading partners such as the europeans, which permit them to be a very effective hub for manufacturing automobiles, for example, to be exported to all parts of the World Without duties. Our problem with mexico has been that theyve been smarter than us about exploiting free trade in the ways the textbooks say they should. Our problems with china are the reverse. Its very easy to say in a world where you work on a black board and end countries with end factors and no one is very large, no one can influence prices by themselves that the trade deficit with one country doesnt matter or their industrial policies dont matter. And to say that, you know, the equilibrated process will raise incomes. Theres a reason that elections have been coming out the way they have. And its not just trumps nonplurality victory. The democrats, you know, have won hold less than 20 of the governors seats right now. Somethings going on out tre. The reality is the policy of the last two administrations has been to not do very much about chinese mercantilism but to provide social programs to compensate these people. And that has not proven enough. My friends on wall street who now will run this administration and will decide ultimately what our trade policy will be, mr. Ross and mr. Navarro will be adequately frustrated im sure by the Goldman Sachs crowd. I doubt theyve looked at the boarded up windows and opioid abuse. Thats a real part of america we dont sighee in the wealth of new york and san francisco. But adjustment, labor market adjustments havent worked in those places. We have to ask why. We have to ask why. Because it is a very maldistributed outcome that is occurring. My view is this is not healthy. We could slip into orartarky and that would not be a good thing either. In order to discuss this you cant constantly back down to to totologies and identities and not address what it is that china does to particular markets in this country. Failure to do so is problematic. I know you want to respond. Mr. Allgeier i am really struck by the fact at how little faulty trade policies on the part of the United States have been identified as the problem. With the exception of concerns of certain things about china, and yet the debate [ inaudible question ] [ inaudible ] mr. Allgeier the trump dialogue is faulty trade policies on the part of the United States and by that, they mean tariff liberalization agreements. Youre on the opposite side saying smart countries do more trade agreements. And no one here other than talking a little bit about china, has said theres this whole decades long failure of u. S. Trade policy. But let caroline and rob respond to your comments. Ms. Freund i just want to say, im really concerned about blaming trade for the labor adjustment problems in the United States. So it is true trade played a small part. So even if you take the study, which actually doesnt look at it in general equilibrium. It looks at the affect on china on manufacturing. They find its 17 of the total lost jobs since 2000. More than 80 of the manufacturing jobs lost were for other reasons. And the reason im concerned about this, is because its so easy to blame the foreigner and not take any blame on ourselves and our own policies. The future of work is different. We have developed machines that do things differently. There are not jobs for the High School Dropout or Just High School educated who wants to go directly to a factory and is unskilled. Even in the manufacturing we do. Look at the factories. There are people wearing these very protective suits because everything has to be done in a Clean Environment and they have to have some education to run the new types of machines. It is a different environment out there. And we have to recognize this. But im really concerned about the xenophobic its all trade. Its easy to blame the foreigner and its not our own fault. And saying that adjustment, that the u. S. Has done so much adjustment and thats why people arent in the labor force is absolutely insane. Europe does way more than what we do. Thats why people dont object to trade in the way they do here. But we need to do adjustment for everything because otherwise trade and outsourcing take the brunt of the blame when, really, its just the future of work is changing. And we have to address this. I absolutely agree, we have to address that people are sitting on their couches and taking drugs. But partly theyre taking drugs because they did back breaking work for many years. We got rid of those jobs. Thats a good thing. That is a good thing. Ill give rob a comment then id like to go to qs and as from the audience. Mr. Shapiro right. Much of what i was going to say caroline has said. But i want to make one other point. When peter says well, if you have a phenomenon, a bilateral trade deficit that cost someone their job, shouldnt you do something about that . Well, of course you should with labor policies. But that also fundamentally ignores the other side of it. Which is to say that trade deficit represents the ability for american businesses and individuals to consume those goods at less cost. Than if they were manufactured here. And that allows them then to buy more things. Made by americans or made by foreigners. Which drives growth. This is, you know, to ignore all of the benefits of comparative advantage driven trade. Is really provides i think a very partial and somewhat distorted picture. Ok, thank you. I do want to go to questions and answers. So raise your hand. Weve got mike roaming around. And when you ask the question, please identify yourself and your affiliation and ask a question, please. Im going to add, if folks could also not speechify with your question and ask a question to the panel, wed appreciate that. Ok. Thank you, manchester trade. I cant remember what copy machine im supposed to associate with peter, i think it was xerox but im not sure. But we loved watching you when we thought you were the most successful trade person when we saw you on television actually saying something that people listened to. Good seeing you again. My question actually is a very simple question. This is way over my head so im learning. The question is, i always thought that the reason we were able to run trade deficits were because we printed money. And the chinese have now gotten wind of this, so they keep talking about displacing the dollar and using the dollar more. Can you explain the relationship between our ability to print the money and whether we abuse it or whether its good or bad and in relationship to the discussion of the causes of the trade deficit. Thank you again for a very educational 40 minutes. Mr. Allgeier who would like to take on that . Lets keep the answer short so we can get more. Mr. Morici other Central Banks, Central Banks that dont have a reserve currency, most fundamentally dont back up their money with gold anymore. They back it up by holding u. S. Currency and u. S. Bonds. For the purposes of International Financial dealings, bonds are as good as dollars. So as long as this will always require us to have a small trade deficit. We sort of provide the liquidity behind the growing money supplies that grow with the economies around the world. Well always by printing as long as we are the predominate world currency, somebody like venezuela thats maybe not a great example. Say mexico will hold dollars at their central bank to back up the peso. There is some relationship there. Does that answer your question, steve . Not at all. Mr. Morici i tried. You see, the economists are most correct when theyre least understood. Mr. Shapiro let me just say one thing and this may clarify it in part. The reason it works is the United States remains the largest and most productive economy in the world. And consequently and produces the highest returns of any advanced economy. And consequently you accept dollars because you have confidence that you can invest them and get a sound return from them in the United States. Mr. Allgeier ok. Got a number of hands up, please. Ok. Mines actually pretty quick. Bill lane, right now im not a affiliated. Nafta and the 18 countries where we have free trade agreements. If you look at 2015 you put the numbers together, trades in balance, slight trade surplus, you add in services. All in all, half exports going to 400 Million People in those countries. And thats by any measure a pretty good return. Peter makes a great point on china. Half of our trade deficit. Its going to be in the news next week. No country in the last century has invested more in infrastructure and education than china has. In fact, if there is a trade war, the first casualties from a u. S. Perspective could easily be agriculture and universities because of the number of Chinese Students studying in the United States. What can we learn from what china has done right over the last 20 years . As we prepare for the visit next week. Ms. Freund i would just say infrastructure and education. So these are two things that we have clearly not done well. You can see it as you drive anywhere in the country or at any airport you arrive into. And infrastructure, obviously, promotes growth. It makes trade within the country much easier. And education. Going back to the person who gets out of high school and needs a job, we need to train them in a way that theres a job thats waiting for them. And i think that the investment, especially in those two categories, infrastructure and education, is what were missing. And what china and other countries around the world are doing. Yeah, as the educator here, or former educator, i taught my last class in march. I am now emeritus. Well, im at the tender age of 68 i started teaching in 1970. I thought it would be a nice time to pass the baton. I dont think any academic campaigned harder for nafta than i did. I wrote about it while i was at the university at maine. I lived here while i taught there. Peter met me that way. Every weekend i would leave maine on a wednesday and go give a speech someplace. Return to washington on the weekend to see my family, then go back to maine. Those speaking gigs provided the airfares for me to have that commuter marriage. No one really campaigned harder. One of my basictiaeic thing was would cause the problems ross perot talked about. It really will. Thats a good thing. American Education Needs a good boot in the behind and parents will be screaming at schools to finally do better. I mean, a High School Education in new york state today and even when i was a boy, was not like the High School Education my father got. And we really needed this. The reality is, we send more than half of our children to college now and colleges arent doing their jobs. One study shows Something Like 40 of graduates cant do critical thinking. A lot of the College Graduates working in starbucks are operating at the full skill level. They look good, smile, sound educated. How educated they really are . I dont really know. Im starting to doubt it. They certainly arent prepared to live in a world where hold your breath guys, if you live 20 more years, i hope to be 88. The dentist filling your cavity may well be a robot. That is indeed, really possible. In that environment, the kinds of work thats going to be available and the countries that are successful, is going to be very high skilled and the countries that are going to be successful have a population of working age people between 2570 who can run those robots as opposed to, you know, serve coffee. And i dont know that were doing what we need to do to be a really successful society. I dont know that we are going to be the most productive economy when we meet again in 20 years. The chinese may very well be. They understand something that we have lost sight of. There is no substitute for being competitive. As an individual, as a company, and as a country. And thinking that the solutions to problems to spend, you know, 60 of your budget on social welfare programs to ameliorate the effects of being displaced. To go around the country and say you have a jobs problem, its no fault of your own and the government is going to solve it. The real problem is a maldistribution of income and things is a mistake. Mr. Allgeier we need to get moving on. My dentist is kind of a robot. Anyway. I hope hes not here. Questions . Real quick, yall agree that trade deficits arent the key matter. Why is it then, what does the Administration Hope to gain by making as we learned yesterday in stuart vaughans letter to the hill, the draft, the leaked draft, that the focus is going to be on the trade deficit, the goods deficit with mexico . The nafta negotiations, thats the first item of approach, thats the most important item and then they go on to other things. What do they hope to gain by that . Mr. Shapiro headlines. Political advantage. Particularly among the president s core supporters. The fact, you know, the it is, i think, as todays discussion has shown is the wrong focus. It will not help any of the people who in Old Industrial towns and those towns who have lost their jobs. But this is a piece of political capital. And it allows the administration to talk about something other than than what the press wants the administration to talk about right now. Mr. Allgeier dorothy . Hi, dorothy from microsoft, thanks very much for your comments. Everybodys in violent agreement that a good trade policy has to also be partnered with a very robust, broader economic agenda. Were part of the services industry, the data on services isnt as good as it should be. But we also know that the u. S. Runs a surplus around the world. A lot of countries are saying, i have a deficit in services. What should i do about it . Theres a little bit of a demonstration effect that i think is kind of lost on the trade deficit debate. Im just wondering if the speakers might want to comment on that. Because, i mean, i dont know that companies can do more than theyre doing as we are on redefining the work force and weve been pretty out spoken on training and stem and all those things. It needs a good trade policy because were a global country, it is a great question and something i had in my comments that i had left out. Services are an area where there is a surplus, it is an area where we are extremely competitive like manufacturers where trade goods and up higher with productivity. Our trade services are exactly the same, they are even better than the traded manufacturing like microsoft. A hope for a long time, i remember back in 2000 when i wrote a paper on the deficit and we were concerned about it then. Services was a miracle that was going to save us because that would continue growing and offset the manufacturing deficit trade that has not happened yet, i think it could happen but this is precisely why we need trade agreements, we need countries to be able to open their service factors on the extraordinary competitive u. S. Services. This is where the biggest gains from the tpp what have gained. Think it is understudied because it is not understood. We do not know how much data is crossing and how it is valued at. Even with manufacturers a lot of what you are buying is services anduse there is a data flow maintenance and things like that, contracts that come with it. Is a incredibly important part and the jobs are just as important if not more for the future of this country. Up, the just to follow way in which trade statistics are designed, if an automobile comes in from germany, that automobile is counted as a manufactured goods. I think the world bank has done carolyn was saying an automobile comes in and there are a lot of services in it. There are Accounting Services that are related, anyway the wto is this multicountry study. They said if you look at the value added, currently the way it is done with customs. Manufactured, we can do the mathematics approach and figure out Something Like 48 of trade services. Way in the back. Hi, i came in a little late and i dont know if you talked about this new executive order where he is talking about the Commerce Department to examine all of those significant deficits to find out what their cause is. I guess that is going to provide him the ammunition that he needs to go after these bilateral trade deficits for what ever tool is at his disposal. Could youdered, comment on that idea . That that would be an effective approach to trade policy. To try to examine the root cause of the trade deficit then more generally what do you think are the trumphat administration is going to have a Significant Impact on the overall trade deficit. I do not think economics economics alone provides an answer to this. I have only read the wall street journal account, as i read the account they said they would tody our trade agreements the extent that they have been theretely enforced trade are particular trade barriers of countries. That sounds a lot to me like the trade representatives office, i think he does not have much staff. They have him over in the eisenhower building, they will be moving him to colorado. Which reflects why this is happening, not to be cute. There is a tug of war and this administration between the National Economic council on the one hand and ross and navarro on the other. A bit like booting it. They are polluting the issue. This impeccable really have when it comes that to china, he does not seem to understand that you cannot come to town and make everybody your enemy. People to help you on health care and jump on the conservatives and expect them to help you with taxes great the same goes with dealing with foreign government. Who hasnt he insulted . One place where he has an effect is what you can make true. They can make it harder to make it nice. The only place you cannot have an impact is some kind of bilateral where he has a lot of leverage. That would either the with exit code or china. Do not think that will happen because of the structure of the Automobile Supply chain. It is that simple. With china that may well be the same. My feeling is the only way he could have an impact is in a bilateral discussion and he is trying to avoid big trouble and blow this up. That could be the chinese, i do not see him changing the whole world on the basis of being angry with the entire world. It is kind of like me trying to take on the whole economics profession. , i dos not work very well not have to be president of the United States to get results. Well, he is exactly right. At least about one thing. That is the ustr does this every year. Every administration when it comes in does this again. Ways that you can find examples in which negotiators can take to other countries and receive a concession and soft negotiation on the basis of particular behavior that has been uncovered. Not that this has any effect on the deficit. The could affect distribution of the deficit but not in size. Know aboutng that we this particular administration is that if it gets its way, the u. S. Trade deficit low rise sharply. The reason we know that is because if he gets his way u. S. Savings will fall substantially. The budget deficit rising substantially. Say that isnted to how i started my comment and that bilateral figures do not really matter that there is the fiscal deficit what we need to worry about for the trade deficit. The trade deficit is not about policy, i want to say this again. It is much more about physical policy. Or other policies having to do with savings and investment, i want to make comment about china. We talked about bilateral with china, trade with china is not just china. Some of the trade deficit with china is because just like we have factories in north america and europe. They have factories in asia, there are components going to asia and come to us. Because trade is measured in gross and not how you. We end up with a very large deficit. It is sexy quite a bit more complicated than that. One of the things about your question that struck me is the with what has been studied hashese trade deficits this really missed a whole bunch of factors that were being discussed here. There were different aspects of trade policy in some of these broader issues. Loop toot even in their look at. One of the things i thought was is this going to be a real autumn up look at trade deficit . Or is it going to be a hit or miss of different topics. Other questions . One here, once there. Maybe, what we will do is ask the question and we will have the panelists have one that last shot. I think we have three questions. I think there is one over here someplace. It is hard to see. My general dissertation was entitled the impact of u. S. Fiscal policies on competitive forces. It was written 30 years ago, i up to ourstood current president and said we do not have the worst for negotiators in the world trade he was startled enter to the next person. The most important thing i heard changing withally the whole nature of supply chain. If you build holdings or thelines and you say all of components have to be american that is an easy policy to articulate. If we have changed the nature of where production is and where the parts are made and how they are traveling around the world you incorporate any understanding that there is no policy articulation of the public understanding. There is an argument that these big trade imbalances are driven by a number of key countries, namely china and germany. More or less structuring or regain debt rigging their countries to regain their capital surplus that can go anywhere. Drives the big trade deficit, i was wondering if you had comments on that . Thank you. I would like to come back to the you spoke about 25yearold on his couch i have sympathy for that guy. I do not see how the trade deficit will affect him. Maybe there are decisions that could help them by the u. S. Whatnment but i dont know the deficit would have to do with that guy. Thank you. If we can quickly with each of you respond to those questions. I would like to start with the first, i completely agree that supply chains and trade are so important, we have seen that with the nafta debate. With companies coming out and saying wait, if we lose mexico we are not going to be able to compete in a global economy. I think the way to explain to the public are these pictures that i have seen of products and there are these little arrows showing where the components are coming from. It is kind of like a picture you may see of a bucket truck showing where all of her jewelry and closer coming from. This is an picture of an actual product. With all of the components we need to make that product. Part in af the wiring card that comes pretty much exclusively from mexico, there is going to be 200 or more of whatever your car is going to cost. I think it is really at the companies who make these products to come out and develop pictures like that. To answer the second question countries are free to organize themselves in ways that meet the goals that they want to achieve. That whatty decides they are going to have is less consumption and more export driven growth. Through regulation and the society accepts that. , i do noteir right have any problems with that. We are defining a different kind of society, one with the markets, and an open economy. We are driven by innovation instead. That is what we are comfortable with. May end, but again however china organizes themselves or however before that korea organize themselves. Highly organized strategy that was export driven, it was really where china learned a lot from korea. Korea was an enormous success. However the organized themselves it will not affect our trade deficit. Our overall trade deficit. We keep on saying this, we keep going past it. Distribution,the but it does not affect the size. I am perfectly satisfied with much more satisfied with the american model and American Values for how to organize the economy then to try and compete with china. A per capitah to change a order figure in a bilateral trade deficit. Let me just add one thing. This has been forgotten and his whole discussion, china brought 500 Million People out of poverty over the last 20 years through their policies. That is something really to be celebrated in the world. They were living under two dollars per day. That is not the case anymore. I would truly celebrate that if we had not driven millions of americans into poverty. Look at how it is right now. In regard to how changing the trade deficit would affect those workers who are not working. Trade policy. Ok. If we could maneuver trade policy in such a way to persuade the chinese to be less protectionist, if we had less of a deficit. We would have more people working. In turn that would reduce our physical deficit, not increase it. Depending on how we get it, i want to be clear on this. I am not about shutting down the trade, i want them to be less protectionist. That can involve selling them more stuff and making more here. That would in turn put people to work, there would be fewer people on food stamps. There would be fewer people on ourcaid, that reduces physical deficit, that reduces our savings deficit. My feeling is that policies and china affect our physical deficit. They affect our trade deficit and in the reverse. I can run it in any direction. That. Olicy what affect one of the things that has gone on throughout this discussion and certainly the administration has not helped itself, with the rhetoric of principle that there is this policy which has been seeing the most terms. We are going to shut down trade with china, were going to put these huge terrace into place. Be about going to getting a better deal, if we managed to get a better deal for a country that is so large and so significant or our deficit read we would have an effect on our finances, it would reduce our savings rate i suggest that both economies would grow much more rapidly than they are right now. All for thisk you very thoughtful discussion. I would like to think the audience and lisa for organizing this. Thank you for your questions, thank you for the panel. This was the kind of discussion we were hoping to have here. We will be addressing as i mentioned before the issue of supply chains and the global economy. We hope that you all come to that event. And so you can watch what we are writing about. Thank you again to the panelists. [applause] tom nichols is a professor at the naval college. Expert, whathis could be a problem moving forward, this is from todays washington journal. And we are joined now by tom to ols, he is a contributor Foreign Affairs and also a u. S. War National Security affairs professor. He is here to talk about his march april 2017 issue of Foreign Affairs on how mericans have lost faith in experts and why this could be a problem moving forward. Thank you so much for joining us today. Guest thanks for having me. Usingso how are americans experts in 2017 and how do they view them . Well, americans have always been skeptical of experts, that is part of our national character, g