Business Acumen and Economic Understanding

In a recent Wall Street Journal op-ed, Republican presidential candidate Donald Trump asserted that the Chinese government imposes a de facto tariff on all imported goods by intentionally devaluing the yuan.  (“Ending China’s Currency Manipulation,” Nov. 10, 2015)  According to Mr. Trump, the undervalued yuan makes international trade unfair and hurts China’s trading partners.  By Mr. Trump’s reckoning, it particularly hurts the United States by weakening American industry and costing millions of jobs.  He goes on to say that he will designate China a “currency manipulator” on day one of his presidency, if elected.  In addition, he will impose countervailing duties on “cheap Chinese imports” as retaliation for the unfair currency manipulation.

On the day after Mr. Trump’s op-ed, Mr. Doug Parker and Mr. Keith Wilson lament, also in a Wall Street Journal op-ed, that the United Arab Emirates and Qatar unfairly subsidize their respective airlines with massive cash infusions.  (“Rigging the Game on Open Skies,” Nov. 11, 2015)  Mr. Parker is the chairman of American Airlines Group and Mr. Wilson is president of the Allied Pilots Association.  Like Mr. Trump, Messrs. Parker and Wilson claim that these subsidies hurt the United States by costing hundreds of thousands of jobs in the American airline industry.

The views of Messrs. Trump, Parker, and Wilson are hardly unusual among business leaders and corporate executives.  A quick look at the International Trade Commission’s website reveals that the ITC currently has some 30 active “import injury” investigations open and another 12 active “anti-dumping and countervailing duty” investigations.  These investigations seek to determine if imports are priced “unfairly” and thereby cause injury to specific U.S. industries or companies.  The current investigations run across a wide range of products, including among others chemicals, various steel and iron products, bricks, sundry welded products, woven ribbons, plastic tape, copper products, sugar, uncoated paper, plastic bags, wooden bedroom furniture, and even tissue paper and ironing boards.  All of these investigations are responses to U.S. companies’ claims of injury owing to unfair import competition.

Each of the above-described contentions illustrates an important – yet, unfortunate — fact, namely that mercantilist views run strongly among business leaders and corporate executives.  This is particularly regrettable whenever such leaders and executives take to a public forum and mistakenly equate their knowledge of business with knowledge of sound economics.  In point of fact, business and economics focus on quite different matters.  The danger of equating business acumen with authority on economics is that the former’s narrow focus on business success leads to the promotion of policy prescriptions that, although beneficial to parochial interests, are often harmful to the general interest.  Protectionism is perhaps the most blatant and harmful example of this phenomenon.

Case in point are Messrs. Trump, Parker, and Wilson.  Although all three claim to be supporters of free trade so long as it is “fair trade” and promotes American prosperity, each defines success only in terms of mercantilist metrics.  Specifically, each looks to export growth and job creation as the measure of a successful trade policy.  This perspective, however, stands in direct contradiction to Adam Smith’s central point that the wealth of a nation is measured, not by the quantity of goods that it sends to other nations or by resource employment, but by the amount of goods and services available for consumption by its citizens.

In his seminal book, An Inquiry into the Nature and Causes of the Wealth of Nations, Smith explained (as I discussed in greater detail in an earlier post here) that the sole objective of economic activity in a world of scarcity is consumption.  If human beings did not need to consume or if there were no scarcity, there would be no need for economic activity, let alone trade or trade policy.  Under real world conditions, however, people not only need to consume to stay alive but also possess wants and desires for goods and services that go far beyond the basic necessities.  Scarce resources must therefore be constantly employed to produce those goods and services.

In terms of trade, Smith went on to explain that, rightly understood, exports are a cost to a nation and imports are a benefit.  Exports mean that a nation’s scarce resources, including human employment, are being used up for another nation’s consumption benefit.  By contrast, importing goods and services allows a nation to consume while conserving scarce resources for deployment in other productive activities, thus expanding domestic production of consumable goods and services and permitting even greater rates of consumption.  The result is an increase in the nation’s total wealth.  Exports, and the resources that go into those exports, are the price a nation must pay for its imports.  As with all exchanges, the lower the price the greater the surplus value to the buyer.

Given this central tenet of economics about the genuine wealth of a nation, whenever the United States can obtain goods and services more cheaply by means of importing them than by producing them domestically, it benefits.  U.S. consumers are made better off.  This benefit will accrue regardless of why the imported goods are cheap, i.e., even if they are cheap because of subsidies or so-called currency manipulation.  Indeed, if subsidies or artificially undervalued currency is the reason, the true harm falls on the citizens of the nations providing the subsidies or “manipulating” their currencies.  Not only are those nations using up their scarce resources for the benefit of American consumers, but their citizens are being taxed to fund the subsidies and are being exposed to higher domestic prices because of the undervalued currency.  It is a double whammy.

What is more, instead of a cost to the United States, the “jobs lost” that Mr. Trump and Messrs. Parker and Wilson claim occurs because of “unfair” trading practices are actually necessary to expanding domestic wealth. The freed up human and other resources are now available for new productive uses or for increasing the output rate of existing productive activities.  The available consumption pie is necessarily enlarged.  By contrast, the logical end of the Trump, Parker, and Wilson mercantilist argument is either autarky or at least significantly diminished trade, either of which must result in lower living standards for the American people.

To be sure, whether owing to market fundamentals or external foreign government policies, the vicissitudes of the international movement of goods and services, as well as capital, will result in certain industry-specific disruptions and transactional costs to individuals.  This inevitable consequence is by all means a basis for a compassionate nation to lend support to those who require retraining and other transitional assistance, but it is not a basis for protectionism and lower living standards.  To the contrary, every time that China devalues the yuan or another country subsidizes its export industries, we Americans should give a hearty thanks for the gift.