International trade is a zero-sum game. Across the globe as a whole, exports = imports. You export something, someone somewhere has to buy it. It is true that export success depends on comparative advantage and international competitiveness, but these are relative terms: international competitiveness is bought at the expense of the competitiveness of others, and comparative advantage implies a near-monopoly position in the provision of some good or service. But exports depend on the willingness of others to import. If one large trading area such as the Eurozone runs a trade surplus, therefore, somewhere else there must be a trade deficit. This is not rocket science.
But trade balances have become part of the same economic morality play that has already seen countries with high debt castigated for "profligacy" (even when high debt is a consequence of economic collapse, not over-spending) and countries with large fiscal surpluses praised for "prudence" (even though a large fiscal surplus impedes the private sector's ability to save/deleverage). To "trade moralists", exports are good and imports bad. Therefore, the aim must be to "earn our way in the world" by exporting, while at the same time discouraging imports by fair means or foul. "Fair means" in this case is deliberately repressing domestic incomes by tight fiscal and/or monetary policy, including outright financial repression: "foul means" are trade tariffs and controls.
To trade moralists, running a large trade surplus, especially if it is accompanied by a large fiscal surplus, is "a priori" a good thing. Therefore, countries that are running trade and fiscal surpluses do not need to make structural reforms. Until recently, this was the position of the European Commission regarding Germany. Germany's trade surplus was an indication of strength, not weakness. And it remains the position of German politicians and bureaucrats.
But following the United States' complaint, the Commission - always quick to jump on the bandwagon - has decided to "investigate" Germany's trade surplus. I am perhaps being unfair: Germany's trade surplus is above 6%, the level at which EU rules say it is too large. But suggesting that Germany might need to make reforms to bring down its trade surplus has provoked German outrage.
It does indeed seem unfair to blame a country that has steadily rebuilt its economy through exporting quality manufactured products over the last decade or so. And it also seems unreasonable to expect Germany to import more. After all, German-made white goods are recognised worldwide as well-made, sound and durable, and German luxury car marques are brand leaders. If German goods are so much better than the goods produced by others that the world wants to buy them, why would German consumers want to buy anything else either? Germany's trade surplus is due to the excellence of its production. It should be congratulated, not castigated, for the hard work and efficiency of German producers.
This is the heart of the "trade moralist" argument, and the Achilles heel of those who call for more balanced trade flows. "German is best" is the belief not only of consumers in the countries that buy German goods, but also in Germany itself. And we are talking beliefs here: like all countries, Germany has some areas in which it excels (like making luxury cars), but "German is best" does not hold across all classes of goods. But as long as people believe that it does, German-made goods will be in demand both internationally and domestically. Looser fiscal policy may give Germans more money to spend, but there is no guarantee that they will spend that money on imports. They may just "buy German".
There is no point in mourning the lack of "togetherness" in the countries of Europe. The European project is fundamentally about trade, and it is fundamentally cut-throat. That is why there is no system of fiscal transfers. European Union membership gives countries preferential trading status with each other, the Schengen treaty and EU directives ensuring the free flow of capital give countries full access to European markets, and Euro membership eliminates currency differences that discourage cross-border trade. But that's as far as it goes. There is no system of "mutual support": countries in the EU are expected to compete with each other for market share and profits, and if they can't compete, they have to make reforms to improve their competitiveness, or die. It's National Darwinism.
And on a larger scale, that's what international trade is like, too. There is no system of mutual support. Countries compete with each other for market share and profits. Supranational organisations such as the IMF encourage the dismantling of trade barriers and capital and exchange controls. Consequently, smaller countries with few natural resources either find some underhand way of drawing business away from larger, stronger ones (such as offering very preferential tax rates to international businesses) or lose competitiveness. Inevitably, smaller countries are taken over by larger ones: in days gone by this was through colonial acquisition, annexation or conquest, but such behaviour is frowned upon these days, so the takeover is more subtle - but foreign purchases of national assets and external supervision of government budgets amount to the same thing, really. Small countries that can't compete internationally don't survive as independent entities. It's International Darwinism.
To be fair, the reforms being made by Eurozone countries to improve their competitiveness do seem to be working. All of them except Greece and France are now running trade surpluses, and even Greece is projected to reach trade balance by the end of 2013:
Bruegel notes that although this is partly because the brutal repression of domestic demand has clobbered imports, it is also because exports themselves have increased. But they speculate that exports may have risen because domestic demand is so weak that businesses have been forced to seek new export markets or die. Anyway, the result is that the whole Eurozone is now running a trade surplus despite the deep depression in a considerable part of it.
But the Eurozone is not the only place where running a trade surplus is considered a moral duty. Trade moralists are in the ascendancy all over the place. Everyone, it seems, is "making reforms" to repress domestic demand and promote exports. This is not encouraging. If everyone tries to increase exports and cut imports by repressing domestic demand, the result will not be a global export-led recovery. It will be a global depression.
Trade moralists are fundamentally illogical and dangerously plausible. The idea of exporting your way to recovery is seductive. But it simply is not possible for all countries to export their way to recovery. Someone, somewhere has to have a trade deficit. At the moment that someone is principally the US* - but trade moralists are becoming louder and more vociferous there, too, and at some point the US is likely to take steps to cut its trade deficit. When that happens, the global impact is likely to be severe.
Unless, of course, new export markets can be found. Have we made contact with alien civilisations yet? We urgently need to establish a trading post somewhere in the vicinity of Alpha Centauri.....
UPDATE. Tim Worstall has pointed out that in the first paragraph I actually mean absolute advantage, not comparative advantage. Correction accepted, sort of - though comparative advantage only works if you also have competitive advantage.
FURTHER UPDATE: Since lots of people have found this post, especially the first paragraph, confusing, I've explained it more fully here.
Report to Congress on International Economic & Exchange Rate Policies - US Treasury
Balance of trade adjustment in the Euro area - Bruegel
The US Treasury is right about Germany's Eurozone policies - Yanis Varoufakis
*The US is a special case. Its enormous trade deficit in goods and services is best regarded as the flip side of its market leading position in the provision of currency for global trade, rather than as an indicator of poor competitiveness. And it is also the market leader in safe assets (USTs), which are better regarded as tradeable goods than debt that has to be repaid. More on this in a later blogpost.