Tag: tariffs

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.