What Krugman Gets Right and Wrong on Trade Surpluses
Longtime readers know that I am not the biggest fan of Paul Krugman, especially when it comes to his advocacy of government inflation and budget deficits. It’s especially ironic when I criticize Krugman’s writing on international trade, since that’s the area in which he won the Nobel Prize. But here we go again, as Krugman’s recent New York Times column on Russia features commentary on trade surpluses that is at best very misleading.
Krugman on Russian Trade
The context for Krugman’s article is the West’s trade sanctions on Russia in retaliation for the invasion of Ukraine. Because other countries are still importing Russian oil and gas but exports to Russia are effectively discouraged, Russia now has a large trade surplus. But even though many people (including fans of Donald Trump) take it for granted that trade surpluses are a good thing, Krugman argues to the contrary:
The effect of sanctions on Russia offers a graphic, if grisly, demonstration of a point economists often try to make, but rarely manage to get across: Imports, not exports, are the point of international trade.
That is, the benefits of trade shouldn’t be measured by the jobs and incomes created in export industries; those workers could, after all, be doing something else. The gains from trade come, instead, from the useful goods and services other countries provide to your citizens. And running a trade surplus isn’t a “win”; if anything, it means that you’re giving the world more than you get, receiving nothing but i.o.u.s in return.
Yes, I know that in practice there are caveats and complications to these statements. Trade surpluses can sometimes help boost a weak economy, and while imports make a nation richer, they may displace and impoverish some workers. But what’s happening to Russia illustrates their essential truth. Russia’s trade surplus is a sign of weakness, not strength; its exports are (alas) holding up well despite its pariah status, but its economy is being crippled by a cutoff of imports. (bold added)
Although I understand the basic (and important) point Krugman is trying to make in the above excerpt, in his zeal to explode mercantilist fallacies, Krugman swings too far in the opposite direction. Specifically, the sentence I put in bold is at best misleading, and at worst simply wrong. (I should note that this has nothing to do with Keynesian ideology; elsewhere I caught the Wall Street Journal making a similar mistake.)
In the rest of this article, I’ll first explain what Krugman gets right in the above commentary, but then spell out what’s wrong with it too.
What Krugman Gets Right on Trade Surpluses
Article from Mises Wire