Thursday, December 29, 2016

Pk on foreign trade forex and cross border fund flow policy plus some comments

"...,,start with proposals for something like a U.S. value-added tax, which would include taxes on imports and rebates on exports. There is widespread confusion ** about what a VAT does to trade. No, it isn’t like a combination of an import tariff and an export subsidy; it’s like a sales tax, and to a first approximation it doesn’t affect trade at all.
To see why, think about competition between domestically-produced and foreign-produced goods in two markets: at home and abroad. How does the VAT or VAT-like tax affect competition in each market?
Not at all. In the foreign market, domestic firms pay no tax on their sales, because the VAT is rebated; neither do foreign firms. In the domestic market, foreign firms pay the VAT-rate tariff, and domestic firms pay the VAT. So the playing field is level in the domestic markets as well.
In short, a VAT isn’t a protectionist policy; it shouldn’t even lead to a change in the exchange rate."

What if a vat replaces a payroll tax ? 

Then of course exports become more competitive globally 

Hence the Reis proposal for club med euronians 

But this is a side bar teaser 

The main act:

" What about straight tariffs? Here things get a bit more complicated.
The starting point for a simple analysis of trade balances is the accounting identity,
Current account + Capital account = 0

where the current account is the trade balance broadly defined to include services and income from investments. The standard story then runs as follows: the capital account is determined by international differences in savings and investment opportunities, with capital inflows to countries that offer good returns. The real exchange rate then adjusts to ensure that the trade balance offsets these desired capital flows"
Time frame please !

" In this simple story, a tariff shouldn’t lead to a lower trade deficit, as long as capital still wants to 
come here; it will just lead to a stronger dollar, making U.S. products less competitive. Imports willstill be lower, but so will exports: you end up with the same trade balance, but with less trade."

Transition period ?

" But this story is a bit too simple, because reduced openness to trade should also inhibit capital flows."
Slower capital flows slow appreciation
 the off set in forex 
" To see why, first consider a reductio ad absurdum. Imagine that we discover a civilization on Alpha 
Centauri, too far away for any trade in physical goods or meaningful services. Would terrestrialinvestors nonetheless want to buy Centauri assets? No – even if they earned a return, how would they bring it back to Earth"

As noted in earlier post this forgets knowledge asymmetry 
"Clearly, then, capital flows do depend on the potential for trade in goods and services.
 But how does this work when we’re talking about restricted openness, not complete autarky?
Think of it this way: when investors put funds into a country, they do so in the expectation that somebody will eventually extract real goods and services from that country and send them abroad. 

Put another way, trade deficits are always a temporary phenomenon, to be followed eventually by surpluses, and vice versa.

Temporary can be a generation long 
" Consider the case of Japan, which used to run large trade surpluses. 

It still runs a surplus on current account, thanks to income on its overseas investments,
 but these days it runs a significant deficit on goods trade "
"But how does a country make its eventual transition from trade deficit to trade surplus?"

" Other things equal, via a depreciation in its real exchange rate. "
Other things are never equal for long  enough ...if at all 

"And this eventual depreciation reduces the return to foreign investors who buy domestic assets "

" The question then becomes, how big a depreciation is necessary? 

And the answer to that question depends on how open the economy is.

 If the trade balance needs to increase by, say, 5 percent of GDP, this will take a much bigger depreciation if initial exports are only 5 percent of GDP than if they start at 40 percent of GDP."

Bigger  meaning  longer and less likely ?
" So protectionism should inhibit capital flows. 
 It reduces trade flows; this means that larger real exchange rate movements are necessary toaccommodate swings in the capital account; and these exchange rate movements themselves reduce 
the return to international investment."

Suddenly. sleeping parts are moving here 

And results lose sharp outlines ...
" By the way, this argument applies a fortiori to temporary trade policies. A Trump tariff that people expect to see rescinded by a future sane president would drive the dollar up temporarily, but the prospect of future depreciation would inhibit investments in the U.S.." 

No way out of it gang
There's an off set

Tariff un responded too by partner
Yes Import Trade shrinks  but export trade shrinks too

"the Dollar appreciation would undermine some of the effects of unilateral tariffs, and definitely hurt exports. "

But what if the fed and treasury conspire to counter the appreciation ?

"  a more protectionist world would in general have lower capital flows as well as less trade; and the U.S., as a recipient of capital inflows, would therefore end up with a lower trade deficits "

Reduced inflows lower net imports
 hey it's a matter of trade credit not investment in productive assets 
Perhaps a profit reduction thru a lower dollar at pay up time 
is absorbable to hold market position in a huge market like ours 

But here we are really letting all parts move ! 

Assuming price responses and quantity responses 
will obey some simple uniform response function 
to sleep perchance to dream 


Moving on 

Brad enters stage right 

" Three points not made by Paul Krugman:
"We" collect revenue from a tariff--in addition to its other effects, it's a way for "us" to make "them" pay somewhat for some of the things our government does.
Over and above this, the dollar appreciation resulting from a tariff means that our terms of trade improve: we get to buy more stuff for each of our exports.
Foreigners will retaliate.
If not for (3), (1) and (2) would together create a pretty strong optimal tariff argument for a tariff. But (3) blows that case up. With (3), a trade war improves the position of import-competing industries and scarce factors both at home and abroad. But with even a moderate amount of increasing returns in the mix it would be a rare import-competing industry whose stakeholders benefitted, and a rare scarce factor that wound up with higher real incomes"

Yes other parts will move and the story complicate
Enough to reverse outcomes ?

Of course