Are Exports the Only Source of Growth?

As the global fight over manufacturing share and exports heats up, with surplus economies doubling down on exports, and deficit economies discussing protectionist strategies, the policies of the largest global economies are in clear conflict. Are trade wars likely, how do they work, and can the global economy regain balance?

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[PBoyle]

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[DorathyJoy]

I don’t know how but you’ve managed to package an unbiased analysis that is more entertaining than the sensationalized segment of economic and financial news. Thank you for your efforts to be the signal and not the noise. I understand that the economy is currently in a downturn and that we must wait for things to get better

[Simone_Grossi]

The period when Patrick opened his channel will be forever be remembered as the Golden era of youtube financial content.

[_lembo_]

I’ve never heard someone explain interest rates like this.

“Artificial low interest rate economy, transfers wealth from savers to borrows” 🤯

[Rosula_D]

I had to pause the video to comment the biggest "THANK YOU!" possible for the part about the European debt crisis. As Greeks, we often hear how everyone here is lazy or useless because of how much debt our country owes. Even our political leaders treat us like that. And at some point, we have internalised this idea and started believing that we deserve to suffer for not being "productive" or "hardworking" enough.

[coscinaippogrifo]

This video needs to be sipped slowly like a good glass of wine. Every 3 minutes it delivers the amount of content that my brain can absorb in an entire day....

[tiararoxeanne]

07:49 Government's interventions on the economy are simply transfer wealth from one economic sector to another:
1) Keeping *exchange rates artificially low (weak currency)* --> transfer wealth _from importers to exporters._
2) Keeping *wage growth below workers' productivity growth* --> transfer wealth _from workers to employers._
3) Keeping *interest rates artificially low* --> transfer wealth _from savers (mostly households) to borrowers (mostly businesses & governments)._
4) *Spread between saving and lending rates* --> transfer wealth _from savers to banks._
5) *Taxes* --> transfer wealth _from citizens to governments._

13:05 Countries which have pursued trade surplus (exports>imports):
1) USA in 1920's
2) Soviet Union in 1960's
3) Brazil in 1970's
4) Japan in 1980's
5) Germany in 2000's
6) China in 2010's

13:24 The German economic case study:
- *In 1990's* : Germany frequently *run current account deficits (import > export).*
- *In 1999* : The *Eurozone started.* German policy makers decided that *unemployment was unacceptably high.*
- *In 2000* : *The German labor union deal.* Trade unions, labor unions, & the government agreed to *seek high employment and stability above wage growth.* It means _productivity increases would not be used to push up real wages, but to increase employment instead._
- *In 2000's* : *The domino effect, part 1* _(positive for Germany):_ *restrained wages -->* reduced household income --> reduced household consumption --> *boosted export* _(to be continued)._
During this period, the _Germany's economic success_ was underpinned by _productivity growth over wages growth._
- *In 2011* : *The domino effect, part 2* _(negative for Southern Europe):_
*Germany boosted export* _(continued)_ --> Germany exported to Southern Europe with zero import tariff due to Eurozone --> Money flew from Southern Europe to Germany --> Southern Europe run on deficit account (import > export) --> on the opposite, Germany had surplus capital to invest --> European Central Bank could only adopt one interest rate, applied to all Eurozone members --> due to different macroeconomic conditions between Germany and Southern Europe, real interest rates in Germany were high (relative to inflation) and low in Southern Europe --> Southern Europe borrowed capital from Germany --> interests were compounded over time --> since Southern Europe run on deficit account, they did not have enough money to pay the loan --> *European sovereign debt crisis.*
The _difference between Germany and peripheral Europe_ contributed to the _European sovereign debt crisis._

15:26 Why open global economy failed?
*1) **_No country is_*_ actually _*_willing to reduce wealth._*
In an ideal world, open global economy is encouraged to form a *_global value chain, _* in which countries specialize in running certain parts of the value chain. Thus, making the overall chain as efficient as possible.
For examples:
- China is the world's factory
- India is the world's back office
- US and Western Europe are the world's R&D.
Less wealthy countries export their way to economic growth (run on _surplus trade balances_ ), while more wealthy countries buy the surplus production and issue necessary debt to finance the trade (run on _deficit trade balances_ ). Money would be flowing from the more wealthy countries to the less wealthy ones, achieving the utopian wealth equality around the world.
However, in real world there is no country, rich or poor, willing to reduce its wealth.
*2) **_No country is willing to increase dependency and vulnerability_*_ in the risk of global value chain disruption._
As proven during Covid-19 pandemic, disruption in small parts of the value chain negatively affect a lot of countries. Having learnt their lessons, a lot of countries put stability over efficiency and spread their supply chains to various locations.
*3) **_In the event of great depressions_*_ (like the pandemic), _*_most countries_*_ tend to _*_prioritize their own economic growth_* by reducing their deficit, or even aiming to become surplus countries.

18:45 Weapons of trade wars:
*a) Offensive:* Subsidies, forex manipulation, suppressed wages.
*b) Defensive:* Trade restriction/import tariff.
19:47 *Import tariff* could even still apply to _goods which are not domestically produced:_
- *If there are locally produced substitute goods* --> demand of the imported goods would be decreased --> _reduction in the country's deficit trade balance._
- *If there's no substitute good* --> demand of the imported goods would not be decreased --> people have to pay the import tariff --> transfer of wealth from citizens to the government --> the government uses the money to pay debts --> _reduction in the country's deficit trade balance._

25:54 Each country's weapon of choice depends on _its ability to manipulate its currency:_
*1) Forex manipulation (currency devaluation)* is used by _countries which abandon the gold standard._ They could manipulate/devaluate their currencies to boost export. In return, they see rapid improvement in their trade balances.
*2) Import tariff (trade restrictions)* is used by _countries which adhere gold standard, _ or which _cannot issue their currencies_ (like the EU members). Since they could not devaluate their currencies to boost export, they use the next best weapon.

26:56 Trade wars are harmful to all involved:
- Most *deficit countries* don't recognize _how difficult rebalancing their economy is_ (looking for new sources of goods, adjusting to alternative goods, adjusting to fewer goods or even none if there is no alternative goods).
- Most *surplus countries* don't recognize:
+) How _vulnerable they are to potential trade restrictions_ from deficit countries, and
+) How _limited their ability to retaliate_ would be.

27:23 Q: Who do _suffer the worst_ in trade wars?
A: The biggest *exporters of goods.*
For example:
- In current economy, a much higher percentage of Chinese, Japanese, and German jobs rely on exports than do American jobs.
- In the event of trade conflicts, Americans might find themselves with fewer goods, but that is better than high unemployment suffered by their trade partners.

Sources and reading recommendation:
19:30 Book: *The Great Rebalancing* by _Michael Pettis (2013)._
25:27 Paper: *The Roots of Protectionism in the Great Depression* by _Barry Eichengreen_ and _Douglas A. Irwin (2009)._

[daanklem]

Astounding and amazing! The mechanics of international economics in half an hour. Oh, and a view into how politics and economics mix. Thank you Patrick!

[Merle]

This one was actually top drawer. I hope for another one explaining the switch from surplus exporting to stronger domestic demand.

[mk-kijc]

This is the best financial channel. Patrick offers cautionary tales and interesting stories that make for a fun time, without the kind of advice that is actionable to your financial detriment. Re. His finfluencer video

[davidarundel]

My core socio-economic philosophy is different, but this was a wonderfully clear & concise video. Thank you for the effort you put into this masterclass, sir!

[headoverheels]

I have lots of compliments, but by far the best thing about your videos is how comprehensive/objective they are. They're always fair, and I always leave learning something new.

[herminator]

This has been the best explanation of the complications of global trade and growth I have encountered yet! Well done! I learned so much from this! Thanks for sharing!

[siliconandsteel]

There are more detailed ideas in "Trade Wars Are Class Wars" by Klein and Pettis, which is a bit newer than "The Great Rebalancing". Changes to labour law and social policy can also strengthen the position of consumers in order to create internal demand for goods and services. Would be great if you could present some of these ideas also. Otherwise, I will have to read it a few more times, which is not exactly easy 😀

[ProfRainestorm]

Crazy this is almost a year ago and you were completely right in your observations and cautionary words. Thank you for sharing your financial knowledge with us.

[yamanawrooz]

No one explains macro economics better than Patrick. Thank you.

[davidferencz]

Given the excellence of your content, the depth of your analysis, and your wit, how do you not have over 1M subscribers? This mystifies me. You're one of the best financial channels that I've run across. Thank you for what you do.

[raypapabear]

Not having studied economics my head freaking hurts when listening to this but I still want to finish the whole video - because this is the best finance rap channel !
This Youtube channel has been bringing me more educational and actual useful life content than my whole education journey. Love you Professor Boyle.

[Bob-wxop]

5 minutes into this video and I knew Patrick will mention Michael Pettis

[ricks]

I'm from the future ... both Metabo and Bosch ( German brands ) have moved most of their production to Hungry and China .
They can no longer afford to produce tools and equipment in Germany.