Factors Affect Trade

This post draws significantly on M. Pettis.

Any policy that explicitly or implicitly affects the balance of production and consumption.

So currency policy affects trade through diverting production and consumption (devalue = raise cost of imports, reduce real wages, opposite for production - which raises employment but does not improve living conditions). Tariffs work the same way.

Taxes - reduce income which reduces consumption (income and sales taxes) and corp taxes raise cost of production so reduces production. Taxes are transfer mechanism - so increasing income tax and reducing corp tax can have a bigger combined effect on trade balance.

Wages - low wages reduce household income, reduces consumption and increases production - relative to productivity.

Subsidies to producers - input costs, cost of capital (which is especially dangerous if the subsidy lowers the hurdle rate of an otherwise unprofitable enterprise)- subsidizing increases production relative to consumption, but also increases employment which has a slightly offsetting impact on consumption. Remember the net impact on trade surplus from rising production is offset by consumption through employment.

Costs to consumer - low deposit rates - which is the subsidy to producers in the form of cost of capital - reduces income, especially in economies where households do not own diversified portfolios of assets, i.e. dependent on savings rates. Wide lending margins (i.e. in China where there is a cap on deposit rates and a floor on lending rates) also reduce consumption.

Other Credit Intervention/Repressed Financial System: lending guarantees, directed lending, etc. This raises production (again, while raising consumption also through employment and increased wages, though longer term if that capital is misallocated the result is reduction of production, employment/wages and consumption. This is also tied to "regulated" interest rates - where interest rates are much lower than comparable growth equilibrium rates.