Ben Bernanke is right. Germany shouldn’t blame easy money in the United States for the world’s woes. Currency mercantilism in China and elsewhere is causing a mess—especially in the United States.
Last week, Bernanke fingered China, Taiwan, Singapore, and Thailand for driving down the values of their currencies. Through massive government purchases of U.S. Treasuries securities, those mercantilists accomplish huge trade surpluses and jack up their GDP growth and employment. The flip side is a huge U.S. trade deficit that sentences Americans to slow growth and 10 percent unemployment.
Sadly, such mercantilism makes free trade an unworkable strategy for the United States.
The anticipated gains from open trade harkens back to an economist’s first lessons—specialization and exchange. Let each nation do more of what it does best, and international trade will raise productivity and living standards everywhere. However, the scheme only works for everyone if trade is reasonably balanced and international commerce does not impose high unemployment on some countries.
The United States annually exports $1.85 trillion in goods and services, and these finance a like amount of imports. This trade raises U.S. GDP by about $195 billion, because workers are about 10 percent more productive in export industries than in import-competing industries—those are the gains from trade.
Unfortunately, U.S. imports exceed exports by another $560 billion, and workers released from making those goods go into non-trade-competing industries, such as retailing, where productivity is at least 50 percent lower. This slashes GDP by about $280 billion, overwhelming the gains from trade, and requiring workers displaced by imports to accept lower wages or no work at all.