Undercover Economist

A trade deficit with a babysitter

The Undercover Economist – FT Magazine, 10 December 2005

Cheap foreign labour has recently made inroads into the economy of Family Harford. My wife pays a student, “Sally”, to look after the imperious Miss Harford for a few hours a week, so that my wife can get on with running her photography business. This is the simplest and most straightforward of transactions. My wife is happy, Sally is happy and even Miss Harford appears to approve of the arrangement.

How strange that if it were judged by the conventional wisdom applied to trade negotiations by newspapers, pub pundits and even our own trade negotiator, this arrangement would be regarded as economic suicide on both sides.

Family Harford runs a substantial bilateral trade deficit with Sally. A bilateral trade deficit is what you spend with a particular trading partner, less what you earn from them. We spend $100 a week on service exports from Sally, and we earn nothing at all from her. That’s a yawning bilateral trade deficit, but we’re happy enough with it.

If politicians were in charge of Family Harford trade policy they would bully Sally to raise her hourly rates, so that trade would take place on a “fairer” basis. The politicians in charge of Sally’s trade policy would refuse.

Boggled already? You should be. But this matches perfectly the state of US-China trade relations: China keeps selling cheap stuff to the US, the US isn’t selling so much to China (but plenty to other parts of the world). The Americans are demanding that the Chinese charge more, and the Chinese are refusing.

Judged by the standards of conventional wisdom, Sally should refuse to trade with Family Harford at all because she is uncompetitive. My wife possesses impressive productive capacities in three industries: childcare, tertiary education and photography. That is, she’s good at looking after Miss Harford, she’s good at passing exams, and she’s good at taking photos of people for money.

Sally can also look after Miss Harford, pass exams, and take photos, but she’s not as good at babysitting as Miss Harford’s own mother, she lacks the discipline and experience to ace all her social science exams the way my wife did, and the market has shown no interest whatsoever in paying Sally to take photographs. The pub philosopher concludes that without some kind of trade protection, my wife will not only look after the baby and run her own business, but muscle in and sit Sally’s exams for her, in between taking Sally’s family snapshots.

That doesn’t make any sense either. First, my wife doesn’t have time to do Sally’s work for her, even though she would do it quicker and better. Second, even if my wife did have time, why on earth would she offer to do all this stuff for nothing? Contrary to popular belief, it’s simply not possible for cheap foreign labour to take all the jobs in Britain, because the British have to work to pay for all the nice stuff the foreigners send us. In the long run, all imports are paid for by exports, and barriers to imports into Britain are also barriers to the exports we send out to pay for them.

Peter Mandelson, the EU trade commissioner, believes that in the run-up to the latest WTO trade negotiations he has offered tariff cuts “even where it hurts us the most” – that is, areas vulnerable to competition.

For Family Harford my wife’s childcare activities fall into that category: lacking tariff protection, they have been eroded by cheap competition from Sally. Have we been “hurt” by this? My wife believes she’s been liberated to spend more time on her photography business. She has a better grasp of trade policy than Mandelson.