Politicians hate trade deficits. Donald Trump likens the US trade deficit to the rest of the world stealing from America because countries sell more stuff to American consumers than they buy from US firms. While most politicians would use more temperate language, they would still like to see the Balance of Trade shift towards surplus.
The Balance of Trade is important. It is essentially the difference between the value of a country's imports and exports for a given period and is the largest component of a country's Balance of Payments. It can be a genuine cause of concern for countries if the deficit is staggeringly large or if the country is less economically developed but it really shouldn’t be too much of a concern for most countries if everything else in the economy appears healthy.
Data released today by the ONS shows that the UK’s trade deficit has decreased. Good news, right?!
Wrong! If you look at the chart you can see that the reason why the trade deficit has reduced is because there has been a fall in the value of imports to the UK. Some politicians might see this as a positive as they tend to view international trade as a zero sum game where exports are the best thing ever whereas imports are pesky concessions we are forced to accept in order to boost our exports. This is nonsense. Imports are vitally important for the economy as they allow firms to access the goods they need to make their products. They also lower prices and give greater choice for consumers which means they have more money to save or to spend on other products. Imports also increase competition which incentivises firms to up their game and become more productive. In short, imports are essential if we want to grow the economy.
We really need a Board of Trade
So, where have all our imports gone? The short answer is, we don’t know. It’s either the result of UK firms facing greater barriers to trade and more friction when it comes to trading with other countries around the world. Or, we simply can’t afford to buy as much as we used to. Neither is ideal.
The Institute of Economic Affairs released a paper this week claiming that Brexit has had no impact on UK trade. The paper has received some criticism, not least of all because the Business and Trade Secretary used it in a speech to try and prove that Brexit was going swimmingly. I have not read the paper yet so I cannot comment on it, but to say that Brexit has had no impact just doesn’t seem right. We have erected trade barriers with our closest and largest trading partner so you would expect there to be at least some extra friction and a reduction in trade. Moreover, we know that while services exports have held up remarkably well, UK trade in goods has underperformed post-Brexit when compared to other G7 countries.
The point is, it is troubling that we don’t know exactly why this is and it is even more disturbing that the government seems to have little interest in finding out. I am a big fan of think tanks (I’ve worked for several) and I like a lot of the stuff done by the IEA in making the case for free markets. However, the government shouldn’t be relying on think tanks to prove their points. Not least of all because the public and businesses simply don’t believe them.
I’ve written about this before, but we really need an independent Board of Trade staffed by experts and with an analysis function. At the moment analysis of trade performance is being conducted by civil servants in Whitehall and officials at the excellent but overstretched ONS.
An independent Board of Trade could actually focus on these tricky questions as to why the UK is underperforming in some areas when it comes to trade and then suggest potential solutions without fear of its findings being covered up because it’s inconvenient or embarrassing for the government.
As an aside, it could be politically convenient for the Conservatives to do this now and bind the next government. The OBR was actually set up by George Osborne for this very purpose in order to trap a future Labour government. This is obviously not an ideal way to conduct public policy, but it should serve as an incentive to the Tories, even though the only incentive they should need is the health of the UK economy.
While we’re at it, the government should launch an Importing is GREAT campaign. I’ve written about this before and it would essentially function like the Exporting is GREAT campaign but the government would be encouraging firms to import more and helping them to do so.
F-word guidance
Chairman of the Federal Reserve, Jay Powell last night was recorded sharing his frustration with a group of climate protestors who interrupted his speech to the IMF and told staff to ‘close the f*cking door’. I guess we now know what the F stands for in FOMC.
However, perhaps the most surprising thing to come out of the speech was that, according to David Beckworth, Powell is suggesting that it’s time to adopt nominal GDP targeting. This is really exciting news. I – alongside lots of other people – have been calling for the Bank of England’s inflation targeting to be replaced by nominal GDP targeting for some time (here and here). Inflation targeting has been relatively effective at keeping inflation on target but this has often come at the expense of economic growth and jobs. Switching to nominal GDP targeting would allow the Bank to take a looser approach to monetary policy during periods of high inflation and protect jobs and economic growth while ensuring that inflation returned to lower target. Scott Sumner wrote an excellent paper for the Adam Smith Institute on what nominal GDP targeting would look like in the UK.
This is important as I pointed out last week that the Bank’s current restrictive monetary policy is now doing more harm than good as while it is lowering demand and so helping to bring inflation down, it is hampering economic growth. Data released today by the ONS shows that economic growth was stagnant in the UK between July and September.
Given that there is generally a lag when it comes to monetary policy, we should expect things to get even worse. Therefore, if we want to control inflation in a way that does not plunge the country into recession we need to look at scrapping inflation targeting and replacing it with nominal GDP targeting.
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Have a great weekend!
Ben