PEORIA MAGAZINE June 2022

economic growth have the potential to reduce the debt-to-GDP ratio. PM : On another debt front, the U.S. has run annual trade deficits with the rest of the world – a situation that occurs when a nation imports more than it exports – for going on 50 years. In February of this year, the trade deficit hit a near-record level, with imports peaking on strong consumer demand – setting a new high — and skyrocketing oil prices. Should this be a concern to Americans, and if so, how so? DC : The U.S. balance-of-trade position is only a portion of a much larger balance-of-payments account. The balance-of-payments account keeps track of all transactions between domestic and foreign economic actors. When I buy a plane ticket on Air France for my summer trip to Provence, for example, I am importing travel services from France and Air France is exporting travel services to the U.S. I, throughmy credit card, authorize my dollar payment to be converted into euros to be transferred to Air France. In the U.S., imports of travel services are recorded in dollars. In France, exports of travel services are recorded in euros. The dollar and euro values are equated at the exchange rate. This single transaction creates a balance-of-trade deficit, as I have sold nothing to foreigners — no exports for me — and I have imported services for which I have paid. However, this has not made me worse off. I must value the travel by at least as much as I paid, or I wouldn’t have booked the trip. Air France is running a trade surplus from this transaction, as it has exported travel services and the transaction must have improved its position, or they would not have sold me the ticket. In effect, I have traded an asset — dollars in my account for receiving a service — and Air France has received an asset — euros converted from dollars into its account — for supplying a service. I have a trade deficit and they have a trade surplus, but we are both better off. Running a deficit in itself is not

damaging. It is simply a recording of the fact that we have purchased more from foreigners thanwe have sold them. That said, if you run a trade deficit, you have to finance the deficit. The analogy is that if my household buys more than it sells over a period of time, I must finance the difference. Basically, there are two ways to do that. I could draw down the value of my assets, or I could take on an additional liability to finance the excess of my expenditures over my income. If I run a trade surplus, on the other hand, I can add to my assets by saving the difference, or reduce my liabilities by paying off the credit card balance. Currency exchange rates alsomatter. As the dollar appreciates, the price of imports falls andwe likely will purchase more goods. But whether we spend more or less dollars on imports in total depends on how sensitive the demand is to the price drop —what economists refer to as the “elasticity of demand.” On the export side, if the dollar strengthens, then foreigners will see their domestic currency price increase and they likelywill reduce their purchases. Wewill export fewer items at the same dollar price, so the value of our exports will decline. As our central bank has taken the lead in raising interest rates compared to other advanced economies – which in part has driven the dollar’s 10 percent appreciation over the past year — we should most likely see a continued increase in the trade deficit. I, however, will enjoy the lower dollar cost of travel services I consume on my European vacation. PM : New York Times columnist David Brooks recently declared that, in the wake of the supply chain disruptions stemming from COVID and the war in Ukraine, among other factors, “globalization is over,” economically and otherwise. Meanwhile, some economists have suggested that we are entering an era of deglobalization. Do you buy that conclusion, or is it premature? Are we going to seeAmericancompanies closing their overseas plants and returning to the U.S., or is it too late to turn back that clock?

DC : The trend of deglobalization has largely been driven by non-economic factors, primarily associated with China’s emerging power. As trust declines and conf lict increases, it is more difficult for global economic institutions to promote increased integration and improved global governance. The United Nations and World Trade Organization are almost totally ineffective on making progress regarding economic growth and development. The International Monetary Fund and World Bank are overwhelmed by putting out fires sparked by economic crises and governmental incompetence. Layer on topof this thedisruptions createdby the COVID epidemic and the war in Ukraine and we see the challenges ahead of restructuring global supply networks, trade policies and international monetary arrangements tomitigate the pressures of increased migration and lack of capital investment, particularly on education and the environment. In the increasingly fractured political environment, it is difficult to see where the leadership will come from to promote sustainable economic growth. We have learned from the current supply-chain crisis the value of diversification in suppliers rather than more concentrated, integrated production linkages. We know how economic growth and development mitigatemigratory pressures, and what institutional and governmental reforms are necessary to prevent stagnation and failure. We can’t turn back the clock on information dissemination and technologically driven advances and what they offer in terms of transformative shifts in adapting to the impacts of climate change. There have been many contrary views of the benef its and costs of globalization. The evidence is clear on what China’s export-led manufacturing development achieved in terms of poverty reduction. There is less consensus on whether these gains were contingent on increased divergences in the distribution of income and wealth.

JUNE 2022 PEORIA MAGAZINE 79