It seems that economics and logic were not the strong fields of protectionist nationalists in college—or at least this is the case with the three lieutenant governors who published an op-ed in The Hill at the beginning of the Summer. In the just-published Fall issue of Regulation (the electrons are still hot and the paper version has not yet hit the newsstands), I write:
The USMCA, the authors glowingly wrote, will “increase U.S. annual agricultural exports by $2.2 billion.” This crowing claim comes just a few lines after the statement that “agriculture is what puts food on the table, literally and metaphorically.” They better take their “metaphorically” very literally because exported agricultural products actually take food away from American tables in order to feed foreigners.
No wonder that with this sort of coherence, protectionists think they can prove anything, including that the only benefit of free trade lies in exports.
For a view of the free-market view of trade, have a look at my article. One question it answers is, Why do American exporters work for foreigners? I also review recent data on the impact of the 2018 tariff on the domestic price of washing machines.
READER COMMENTS
Jon Murphy
Sep 16 2020 at 8:49am
That “exports are the benefits of trade” is their main argument is particularly interesting because as soon as national defense (or trade sanctions) gets involved, they change their tune: imports are the benefits to trade. It suddenly becomes about not exporting to the dangerous nation. If exports were the benefits and imports harmful, then rather than imposing trade sanctions on, say, Iran, the US government should want to flood them with goods and services.
Craig
Sep 16 2020 at 10:39am
Exports from my firm point of view is simply sales. I mean, sure, the textbook definition means I ship across an international boundary, but ABC, Always Be Closing! Now businesses have a sales focus of course and when I say that sales benefit me it is implicitly because I then make profit and have money to spend on imports which, in this case, I’m broadly defining in the same manner as exports.
There’s a reason why its expressed like this. Its because selling and producing are the hard parts. Spending? Trust me, my wife is regularly degaussing and sometimes even melting credit cards.
Importing? Any idiot can spend money.
Jon Murphy
Sep 16 2020 at 12:09pm
I’m not following. What is the “its” and “this” in your sentence referring to?
Pierre Lemieux
Sep 16 2020 at 2:12pm
@Craig: Yes, but except for ascetics, most people, between the alternative of earning only (and not spending) and the alternative of spending only (and not earning), would choose the latter.
Luis Freitas
Sep 16 2020 at 8:13pm
The logic of protectionists is that it’s better to finance and, therefore, protect companies in their own country because they may get their vote and these producers will get money in their pockets. The problem is that foreign producers might do it faster, with better quality and at cheaper prices so the population is paying for more expensive food when they could buy it cheaper elsewhere and thus there are more losers than winners with protectionism.
Regarding one of the comments “anyone can spend money/import” yes but the buyer has the power of choice so he should be able to buy the cheapest food of better quality. This sometimes is made impossible by protectionist governments.
Luis Freitas
Sep 16 2020 at 8:28pm
There are always more losers than winners with protectionism.
The few winners are the farmers who get financial help. The problem is that there are usually many other foreign farmers who produce faster, cheaper and better quality goods but these goods usually only enter the importer country with a customs tax, therefore, making everyone’s life more expensive…
The losers are everyone else who is forced to buy more expensive food.
The reason why farmers in the USA or the EU produce to the rest of the world is exactly because they get extra funding that serves as an incentive to produce more. By producing more they flood Africa and many areas in the world with these extras. Every state wants to control the world market on agriculture but at the expense of all its citizens who pay taxes that are given to producers that can, in some cases, not be the most effective producers.
Pierre Lemieux
Sep 17 2020 at 10:32am
@Luis: In line with our argument, you might recall Mancur Olson’s observation illustrating the logic of collective action: in underdeveloped countries where farmers make up the majority of the labor force, the state exploits them for the benefit of the urban elite; in rich countries where farmers are a small minority of the labor force (1% in the US), the state exploits the rest of the population in their favor.
Warren Platts
Sep 20 2020 at 10:50am
Not at all Pierre! (Also note that you are conflating protectionism and mercantilism.) All we do is point out the shell game played by free traders when they tout that the main benefit from free trade is the consumer surplus generated by imports, yet neglect to mention that this surplus is largely canceled by higher prices generated by exports. Note that soybean prices are as of this writing at multiyear highs thanks to ramped up exports to a Communist regime. Education anyone? Forget about it…
Thus the main benefit of free trade turns out to the “deadweight gain” in efficiency that further turn out to be relatively quite small in the non-cartoon graph, real world. (And even these efficiency gains are largely canceled by efficiency losses caused by national specialization: national economic diversity is reduced, and hence national division of labor. It happens that the best English wine growers don’t make the best clothmakers.)
Indeed, the only way exports help consumers of the home country is if home exporting firms can achieve economies of scale that reduce unit production costs. And that requires a special sort of product: e.g., commodities like soybeans and natural gas are not that: they require exploitation of natural resources subject to diminishing returns: the good fields are exploited first, marginal fields last. Similarly, labor intensive services like higher education and medical tourism are also subject to diminishing returns.
Manufactured goods, however, are the sort of product that can be subject to increasing returns. A single firm can largely monopolize the entire world market once it establishes an economy of scale that no smaller firm can match. And guess what: it further turns out protectionism can help that firm lock-in the entire world market! Krugman won his Nobel Prize for figuring out the math on that gem…
Unfortunately for American consumers, however, large manufacturing firms will seek cheap labor wherever they can find it, if given the chance. Consider General Motors, once the world’s largest automaker, and now Boeing, it seems, at least for their civilian aircraft division.
Indeed, the only sorts of manufactured items the U.S. dominates are things like F-35 stealth fighter jets whose government financed, top secret technology is strictly prohibited to be offshored because of national security requirements. And economies of scale in the fighter jet and supercomputer chip world are of little benefit to ordinary U.S. consumers.
Bottom line: for U.S. consumers in particular, exports raise prices, thus largely canceling lowered prices of imports.
Jon Murphy
Sep 21 2020 at 4:17am
Citation needed
Warren Platts
Sep 21 2020 at 12:13pm
Simple supply & demand, my friend. Exports increase demand for the exportable in the home country. Prices must go up (unless you have a downward sloping supply curve).
https://www.wsj.com/articles/soybean-prices-hit-two-year-high-buoyed-by-chinese-demand-11600442022
Jon Murphy
Sep 21 2020 at 12:37pm
Citation does not support claim. Indeed, for some reason, you changed the claim. Try again. As I explain below, your claim is not supported by supply and demand. Thus the citation needed.
Warren Platts
Sep 21 2020 at 1:32pm
The citation empirically support the claim: exports raise prices. Here is a link to the theory, where they say (while discussing a hypothetical case of Brazil exporting sugar to USA,
Although, they don’t phrase it quite right: exports don’t affect the domestic supply curve–only the quantity supplied by domestic producers.
https://courses.lumenlearning.com/suny-microeconomics/chapter/reading-demand-and-supply-analysis-of-international-trade/
In general, exports raise prices, with the major exception being some manufactured goods that are sometimes subject to economies of scale.
Thus USA consumers are hit with a double-whammy: there is the ordinary effect of exports raising prices; but because we have offshored half of our manufacturing capacity, we do not participate much in the ameliorating effects on prices due to exporting products that have increasing returns!
Jon Murphy
Sep 21 2020 at 1:51pm
That’s not the claim that needed supporting. We clearly quoted the claim that needed supporting. We quote again:
The claim that higher prices from exports cancel lower prices of imports needs defending.
Jon Murphy
Sep 21 2020 at 11:51am
There are several problems with this statement, both theoretically and empirically. I will begin with the latter and proceed to the former.
1)
Jon Murphy
Sep 21 2020 at 12:08pm
Oops. Somehow I posted too soon. No worries.
Free traders do not make that argument. The argument is that consumption is the ultimate goal of production and trade, but that is not quite the same as saying the ultimate end goal is consumer surplus. The concept of consumer surplus did not come about until around 1900. Adam Smith, David Ricardo, John Millar, David Hume, Richard Cobden, etc all made free trade arguments not based on “consumer surplus” but by various other criteria, mainly justice.
Theoretical issues:
When you say that consumer surplus is “cancelled out” by rising prices in export goods, that means that producer surplus is increasing. What we would have, then, is simply a transfer of surplus from consumers to producers. So the nation, from a welfare perspective, would at worst be indifferent on net.
However, since we are assuming a nation acting with comparative advantage here (however: you are not consistent with this assumption. You switch back and forth between talking about national comparative advantage and individual comparative advantage not realizing these are conceptually mutually exclusive. Remember: national comparative advantage is a useful pedagogical tool, but not too useful an analytical tool. See Boudreaux 2019, Murphy 2020, or any intro econ textbook section on comparative advantage) then it doesn’t make sense to say that the loss of consumer surplus is less than the gain to producer surplus. The definition of comparative advantage does not allow that. If the loss to consumers were greater than the gains to producers, then the consumers would be able to offer better terms of trade to the producers than the foreign consumers, which means the good in question would not be exported. I invite you to review the basic models, do the math, and prove it to yourself.
In short, if what you say is true, then the nation (or individuals) are not acting according to comparative advantage, but rather acting in comparative disadvantage! This preference for higher costs and lower benefits would need explaining.
Warren Platts
Sep 21 2020 at 12:57pm
Jon, your comment is illustrative of the shell game being played. You flicker back and forth from the selling point that the interests of consumers are maximized by trade, to the theoretical point that trade maximizes national net welfare.
In the first case, imports generate a nice consumer surplus for consumers. But what is elided is the fact that exports generate a loss of consumer surplus.
In the latter, theoretical case, it is granted that there is a consumer surplus loss caused by exports. But that’s OK because the lost consumer surplus is made up by an even greater producer surplus. Thus it turns out that the true reason for trade is the (rather smallish) efficiency gains.
But let’s try to keep the discussion on Pierre’s point above that the protectionist critique of free trade is that only exports count (implying we should try to run trade surpluses, if I understand Pierre point correctly).
What I’m trying to say is that is not at all the American System critique of free trade (although a naive mercantilist might say that).
The main point is the gains of free trade are small and (a) not worth the disruptions caused by the suppression of wages resulting from free trade; and (b) the gains from free trade are without doubt outweighed by the slowdown in economic growth caused by said suppression of wages.
The goal is neither maximal trade surpluses, nor autarky. Trade happens, but it is not emphasized. Rather the goal is to maximize wage levels in order that (1) worker household consumption is maximized; (2) maximal consumption maximizes aggregate demand for production; (3) high wages provide a powerful incentive for firms to invest in new, labor-saving machines (aka automation); (4) the high wages + high aggregate demand + high labor productivity = faster GDP growth. Thus these benefits far outweigh any losses incurred by giving up on the not-too-beautiful-to-be-false notion of free trade.
Jon Murphy
Sep 21 2020 at 1:10pm
Given I say explicitly otherwise, I don’t know how you can make that claim. Rather, I showed how, given your own misunderstanding of theory, your point was incorrect.
In other words, it only appears a shell game is being played because you fail to understand the theory.
Both (a) and (b) are self-contradictory. Are there gains or not? In both cases, you say there are gains in the first half of the sentence and then say there are not gains in the second half of the sentence.
So, if your elucidation of the “American System” [sic] is correct, then it is self-contradictory.
We have you misunderstanding of theory, unable to provide citations for your claims, and subscribing to a system that is internally contradictory. You must solve these problems before I, or anyone else, can effectively respond to you.
By the way, given your celebration of tariffs, your claim that you really want higher wages falls upon skeptical ears.
Jon Murphy
Sep 21 2020 at 1:58pm
As an aside (and this will be the last I say on the matter), the timing of your rejection of the welfare criteria is interesting. For years, you’ve been agitating here and other places for optimal tariffs. Indeed, you repeatedly supported Trump’s tariffs on China on optimal tariff grounds. As recently as August, you were arguing for tariffs on optimal tariff grounds Optimal tariffs, you may recall, is a net-welfare argument.
So, your big reasoning for protectionism for years was on optimal tariff grounds. Now that data are coming out that show undeniably that the tariffs reduced net welfare, you reject the argument wholly and claim that the goal of trade policy is to increase wages.
Pierre Lemieux
Sep 22 2020 at 10:14am
@Warren Platts: The danger is to consider economics as just a disjointed set of rhetorical statements and pick up bits and pieces of it off the shelf to support a-priori political arguments, neglecting the foundations of the economic way of thinking such as the benefits of exchange. Jon’s points are informed by a general understanding of, and inquiry into, economics. (Other crucial parts of economics are, for example, the distinction between partial-equilibrium and general-equilibrium analysis or the meaning, and pitfalls, of welfare—not to mention the development, over the past seven decades, of the economics of politics.)
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