I suspect that the average American assumes that low-income countries have a competitive advantage in international trade. Economists often counter that argument using Ricardian trade theory. But society does not care about “theory”, and remains uncertain. So what about the real world?
There are many ways to look at this question, but I suspect that most people are most concerned about the trade deficit. So let’s consider the question of whether lower wages tend to lead to more current accounts. Here is the latest data from it The Economist:
Let’s start by focusing on the top half of the list, from the US down to Switzerland. What do you notice? With the exception of China and (maybe) Russia, they are all developed economies, with wage rates above the global average. And yet, despite the fact that most of those countries have wage rates above the global average, most are using current account surpluses (grey). Of course, some of the biggest surpluses are in high-wage areas, such as the Nordic countries and Switzerland.
Now focus on the lower part of the list, from Turkey down to South Africa. Most of them are low-income developing countries, and most run current account deficits (peach).
But even that undermines the pattern. The bottom half of the list includes six advanced economies (the 4 “tiger economies”, Israel and Australia.) And 5 of those 6 are now running current account surpluses. Remove those six developed countries, and the bottom half of the list is mostly associated with current account deficits.
But it’s worse than that. Many “exceptions” that are not fully developed but still use CA surpluses are high middle-income areas, such as Russia, Malaysia, and Argentina. If we use World Bank Ratings of GDP per capita (PPP) in 2023, then Thailand ($23,423) is the poorest country with a CA surplus. China is estimated at $24,558. Both are slightly above the world average ($23,010.)
Admittedly, the Economist’s list does not include most of the world’s nearly 200 countries, many of which are small. I suspect that there are few low income countries that use CA residuals. However, it is a very large sample and includes almost all of the world’s major economies, both developed and developing.
Maybe you’re one of those people who doesn’t trust economic theory, and takes pride in looking at how things work in the real world. If so, you should be relieved to learn that low wages do not appear to give countries an unfair advantage in international trade.
So why do so many people believe the opposite? I suspect they put too much weight on one perception, the trade deficit the US has with China. A lot of anecdote is data.
PS. I was generous with the opposite view in showing Russia and Malaysia as middle income. The World Bank has Russia slightly ahead of Greece, and Malaysia slightly behind.
PPS. I’ll get into monetary policy another day, but if you compare the US to the other countries on the list, you’ll see why I worry more about our budget deficit than the CA deficit. Also look at CA balances in 5 countries that run budget surpluses. As I keep saying, the Nordics and East Asians are the biggest savers in the world.
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