Category: trade

Understanding Imports and Exports Correctly

Theodore A. Gebhard

Trade association executives are paid to look after their member companies’ interests.  Part of that responsibility is to advocate public policy positions that advance or protect those interests.  Not surprisingly, such advocacy often cherry picks data and characterizes that data in ways that can generously be called suspect.  Nearly always, trade association public policy positions rest on the claim that the interests of the association’s member companies are the same as the interests of all Americans, and therefore what is good for the association membership is good for America.  Rarely, however, is this equivalence the actual case.

A good illustration of this kind of advocacy takes the form of a Letter to the Editor in today’s Wall Street Journal written by Mark Duffy, the president of the American Primary Aluminum Association.  (Canada’s Aluminum Subsidies Hurt the U.S., Letters, Digital July 27.)  Mr. Duffy laments the loss of U.S. aluminum smelting capacity, which he attributes, at least in part, to subsidized Canadian imports.  In so doing, Mr. Duffy makes the error of all those who see production and employment as the end of economic activity.  As Adam Smith taught us two and a half centuries ago, we engage in economic activity in order first to sustain life and then to improve life with ever higher standards of living.  That is to say, the ultimate purpose of economic activity is consumption and the wealth of a nation is the extent of its consumption pie.  Imports therefore are rightly considered benefits to a nation insofar as they add to the nation’s consumption pie, while exports are rightly considered costs as they deplete the consumption pie.  Another way to think about this to consider that when we export, we are utilizing our scarce resources for someone else’s (foreigners’) consumption benefit.  When we import, we are enjoying goods and services produced out of some other country’s scarce resources.  If a country is subsidizing its exports to the U.S., we benefit all the more.

Below is a reproduction of a response to Mr. Duffy’s letter that I submitted to the Journal.

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In his Letter to the Editor, Mark Duffy, President of the American Primary Aluminum Association, castigates Canada for subsidizing its aluminum industry to the tune of $850 million.  (Canada’s Aluminum Subsidies Hurt the U.S., Letters, Digital July 27.)  Mr. Duffy claims that these subsidies have contributed to a fall in the number of American smelters from 23 to four since 2000.  As to Mr. Duffy’s alarm over this development, I suppose it is obligatory that the president of a trade association equate his members’ interests with the interests of all Americans.  Doing so in this case, however, requires relabeling benefits as costs and costs as benefits.  In point of fact, America should be sending a thank you card to Canadian taxpayers who foot the bill for the subsidies, as the subsidies not only enable Americans to consume aluminum-containing products more cheaply but also enjoy a larger array of other products and services.  This larger array comes about because scarce resources, including labor, that are freed up by importing less costly Canadian aluminum become available to expand alternative productive activities and create new ones.  For American consumers and the American economy, it’s a double win — cheaper aluminum-containing goods and greater total national product.

Theodore A. Gebhard

(Mr. Gebhard was formerly a Senior Economist with the International Trade Administration.)

Peter Navarro Is Wrong Still Again

Theodore A. Gebhard

Once again President Trump’s trade adviser displays his lack of understanding of how nations gain from trade. In an op-ed in today’s Wall Street Journal, Mr. Navarro contends that China’s trade practices victimize the U.S. (“China’s Faux Comparative Advantage,” 4/16/18) In doing so, he makes two errors. First, he is wrong to suggest that trade with China that diverts from the “textbook” model of comparative advantage always generates harm to the U.S.  To be sure, ever since David Ricardo described comparative advantage in terms of relative resource and knowhow endowments, that example has been a staple of textbook discussions of how trade can produce gains.  The gains arise because comparative advantage permits both sides to conserve resources.  Those saved resources can then be deployed in other productive activities, thus increasing national wealth.  This result holds even when one trading partner subsidizes its exports, gives tax preferences to its exporters, or “dumps” goods by selling overseas at a lower price than at home.  Such policies, though harming citizens and taxpayers in the exporting country, conserve resources in the importing country and benefit consumers with lower prices.  Letting Chinese citizens and taxpayers subsidize U.S. steel consumption, for example, means that resources that the U.S. would otherwise have to deploy to making steel can now be deployed elsewhere, i.e., we get cheaper steel and other stuff instead of just steel.  That the Chinese government chooses to harm its own citizens is no reason for the U.S. to retaliate by doing the same to its citizens.

The second error that Mr. Navarro makes is conflating such activities as cyberespionage and intellectual property theft with export subsidies and tax preferences.  Stealing property, whether tangible or intangible, is categorically wrong, and Mr. Navarro is right to call out such illicit activities.  The error lies in failing to distinguish between these harmful Chinese practices and practices that are beneficial to the U.S.  The former of course should be targeted for reprobation and fully proscribed.  The latter should be left alone.  Regrettably, the Trump Administration’s recent trade initiatives toward China, which Mr. Navarro helped to formulate, aim indiscriminately at both the good and the bad.   

Still More Trade Illiteracy from Peter Navarro

Theodore A. Gebhard

Sadly, President Trump’s instincts regarding trade wherein he believes negative trade balances to be a consequence of other countries’ ripping off the United States is reinforced by his chief trade advisor, Peter Navarro. Economists have long known this view to be specious, and acting on it in policy will only end up making Americans economically worse off. In an op-ed in today’s Wall Street Journal, Mr. Navarro rejects over 200 years of economic learning. In response, I have submitted the following to the Journal as a Letter to the Editor. (See also my earlier Posts on trade economics here and here.)

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As a former economics professor, I am disheartened to see one of Mr. Trump’s chief advisors, Peter Navarro, reject over 200 years of economic learning by speciously using GDP accounting to contend that current account imbalances should be a significant policy concern.  (“Why the White House Worries about Trade Deficits,” 3/6/2017)  Mr. Navarro contends that boosting net exports over imports boosts growth and, implicitly, the country’s economic well-being.  As many economists acknowledge, however, GDP is a poor proxy of economic well-being and, in turn, GDP growth is a poor measure of changes in a country’s wealth.  Indeed, by Mr. Navarro’s reasoning, we can increase wealth simply by enlarging government expenditures financed by fiscal deficits or money printing.

Starting with the indisputable premise that the ultimate end of economic activity is consumption, Adam Smith taught in The Wealth of Nations (1776) that a nation’s well-being is determined by the amount of final goods available to its people.  Exports thus are a cost to a nation (using up its scarce resources for foreigners’ consumption benefit) while imports a benefit (consuming out of others’ scarce resources).  Exports are the cost of paying for imports. 

A nation benefits from trade whenever it can obtain goods from abroad cheaper than it can produce those goods at home.  Obtaining goods cheaper from foreign sellers not only increases the available consumption pie (and thus a nation’s wealth), but it also frees up resources that can be deployed to expand wealth even further.  What’s more, it matters not whether the goods are cheaper because of comparative resource advantage or because other countries inflict harm on themselves by subsidizing their exports. 

Economic history has confirmed Smiths’ wisdom many times over.  One would hope that this wisdom is not entirely lost on our policy makers. 

Theodore A. Gebhard

More Economic Illiteracy on Trade

Theodore A. Gebhard

In the “Letters to the Editor” section of today’s Wall Street Journal, Felix Dupuy of Whitefish, Montana laments that the 41 million U.S. jobs supported by trade come with a $500 million trade deficit, which he claims is largely paid for by the Treasury “in the form of increased debt.” (Letters, July 27, 2016)  The assertion is a non-sequitur.  The connection between the U.S. current account deficit and the U.S. fiscal deficit is tenuous at best.  The former moreover represents neither harm to the American economy nor any debt to the Treasury.  To the contrary, the current account deficit is an indication of the greater prosperity of  the U.S. relative to the rest of the world.  Because Americans are rich, they buy more from others than others buy from them.  Also, the current account deficit does not increase the public debt.  The Treasury has nothing to do with private sector trades that happen to cross borders.  Finally, foreign sellers accept dollars for goods only because those dollars represent claims on American goods.  That the dollars are not repatriated in some arbitrary time frame (one year) is unimportant.  Ultimately, our imports must be paid for with exports when foreign dollar holders redeem their claims.  —  By contrast, the fiscal deficit is real debt arising from unpaid-for federal spending.  It is also cumulative, now standing now at a $19 trillion burden on future generations of Americans.  (See also my earlier Posts on trade economics here and here.)

The Basic Point of Trade

Theodore A. Gebhard

Today in his weekly Wall Street Journal column, William Galston says that trade has not lived up to its promise because it has cost the U.S. too many jobs. (“Why Trade Critics Are Getting Traction, Mar. 30, 2016″)  Someone should give Mr. Galston a copy of Adam Smith’s Wealth of Nations as quickly as possible.  In equating U.S. jobs with the nation’s economic well-being, Mr. Galston ignores Smith’s key insight.  Smith taught that a nation’s wealth is measured not by its store of gold, its exports, or the number of jobs it has, but rather by the quantity of goods and services available for consumption by its populace.  Smith makes the point that the ultimate purpose of all economic activity is to satisfy human wants and needs.  Work and production are means to that end, but not ends in themselves.  In a world in which resources are scarce, employment of labor and other factors of production is the cost that a nation incurs in order to consume.  Hence, if a nation can reduce the employment of any resource, including labor, required to yield a given output, those freed up resources can then be used to produce even more goods, thus making the nation wealthier.  Simply put, a wealthy man is someone who can live well while working less; a nation is no different. Mr. Galston, like too many others in this political year, fails to grasp this basic economic point. (See also my earlier Posts on trade economics here and here.)