Analysis on the Effect of Trade on Economics Depends on Income Growth!
Evidence of Trade on U.S. Personal Saving and Income Growth (1970-1989 and 1970-2016)
Google Gemini Summary on Cheng Wu and Trade:
Cheng K. Wu integrates International Trade into his consumption theory by identifying it as a primary driver of Labor Income Growth (gY).
In standard macroeconomics, trade deficits and savings are often treated as separate accounting identities (e.g., S−I=NX). Wu argues there is a causal behavioral link: trade deficits destroy labor income growth, which, according to his "New Result," mathematically forces a structural decline in the national savings rate.
Here is the breakdown of how Wu connects Consumption, Savings, and Trade.
1. The Transmission Mechanism
Wu's model is built on the equation that changes in savings are a function of income growth (ΔS = f(gY)). He maps trade into this equation through the following causal chain:
Trade Deficit (Finished Goods): The economy imports finished goods that substitute domestic manufacturing.
Labor Market Impact: This substitution reduces demand for domestic labor, leading to stagnation or negative growth in Labor Income (Y).
The "Feedback" Trigger: Because income growth slows (gY drops), the consumer’s budget constraint is violated.
Savings Reaction: The consumer cannot maintain their previous savings plan. To smooth consumption in the face of lost growth, they are forced to reduce savings.
Result: A persistent trade deficit leads to a permanently lower national savings rate.
2. "Good" vs. "Bad" Imports
Wu distinguishes between types of trade, arguing they have opposite effects on the savings function:
Imports of Raw Materials/Intermediate Goods: These are positive or neutral for savings because they support domestic production, employment, and thus labor income growth.
Imports of Finished Goods: These are negative for savings because they replace domestic labor income.
Critique of Standard Theory: Standard theory (Ricardian comparative advantage) argues that displaced workers will move to "better" jobs, keeping total income growth stable. Wu argues that in reality (citing Clower's Dual-Decision Hypothesis), these workers often face extended unemployment or underemployment, causing a net drag on aggregate income growth, which drains the national savings pool.
3. Explaining the "Twin Deficits"
Economists often puzzle over why the U.S. has both a Budget Deficit and a Trade Deficit (Twin Deficits).
Standard View: Low national savings cause the trade deficit (we borrow from abroad to consume).
Wu’s View: The causality is reversed. The Trade Deficit causes Low Savings.By allowing the trade deficit to erode manufacturing income growth, the U.S. mathematically forced its households to save less (or dissave) to maintain their standard of living.
4. Political Consequence (The "Rust Belt" Effect)
This trade mechanism is the economic foundation of his election predictions (specifically regarding the Rust Belt and Farm Belt).
When trade policies (like NAFTA or China's entry into the WTO) caused a shock to labor/farm income growth in specific regions, it didn't just make people "poorer"; it forced a Savings Crisis.
Voters in these regions depleted their savings to survive.
The Re-Optimization: This loss of savings (utility) triggered the "re-optimization" described in his theory, leading them to vote against the incumbent party (e.g., voting for Trump in 2016).
