"Paul Krugman
How to think about trade imbalances
On Thursday, January 30, Paul Krugman joined Markus’ Academy for a conversation. Paul Krugman is Professor Emeritus at Princeton
University, the Distinguished Professor of Economics at the Graduate
Center of the City University of New York and the 2008 recipient of the
Nobel Prize in Economics.
A few highlights from the discussion.1
A summary in three bullets
● A new view of trade imbalances, exemplified by Pettis and Hogan
(2024), has gained traction in policy circles and think tanks, arguing
that these imbalances are a distortion due to government-actions, hurt
deficit countries, and should be addressed with tariffs
● There are several problems with this new view. Trade need not be
imbalanced if some countries can attract investment better than others.
It is also not clear that imbalances lead to deindustrialization, nor
that a large manufacturing sector should be a policy objective
● Tariffs are never the solution. We know two things about tariffs: (1)
they lead to retaliation and (2) will strengthen the dollar, hurting the U.S.’s exports
..

Is deindustrialization a problem?
● The third point of the new trade view is that trade imbalances hurt
the deficit countries because they contribute to their
deindustrialization
● Manufacturing capacity is crucial for national security, but the
belief that it provides the best jobs is outdated. Non-supervisory manufacturing wages now are lower than the private sector average (with
only a modest premium after demographic adjustments)
● Manufacturing once offered better pay due to strong unions, but these
have been weakened and there has been no unionization in the large
service companies
● More broadly, the extent to which deindustrialization stems from trade imbalances remains an open question
● In 2023, Germany’s manufacturing trade surplus exceeded 20% of GDP,
while the U.S. had a manufacturing trade deficit of just over 4% of GDP
● Despite this, Germany’s GDP remains at pre-COVID levels, while U.S.
GDP is 10% higher. While demographics play a role, their experience
suggests that trade surpluses and strong manufacturing alone do not
guarantee economic success
● We tend to overstate industrial global strategic mistakes
underestimate the real challenges: weak productivity growth,
demographics, and low infrastructure investment
● Germany’s ability to diversify away from Russian natural gas shows
that modern advanced economies are more diversified and flexible than
often assumed.
[43:02] Is there a case for tariffs?
● If one believes that trade imbalances are a result of government distortions, that trade surpluses drive deindustrialization, and that deindustrialization is bad, one may be sympathetic to tariffs
● However it is not clear that the size of the manufacturing sector
should be a policy objective. Strategic industries are a different
matter, and subsidies may be more effective for these
● Even assuming a larger manufacturing sector is desirable, do tariffs achieve them?" https://bcf.princeton.edu/wp-content/uploads/2025/01/2025.01.30-MA-Paul-Krugman.pdf

Charts available from the following substack artilce on the same topic: https://paulkrugman.substack.com/p/rethinking-trade-imbalances

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