Friday, November 28, 2008

People and Businesses Trade, Not Countries

There's a growing anti-trade sentiment in our country. Much of the dialogue is grossly misinformed. Let's try to untangle it a bit with a few questions and observations.

Does the U.S. trade with Japan and England? Put another way, is it members of the U.S. Congress trading with their counterparts in the Japanese Diet or the English Parliament? Of course not. When I purchased my Lexus, I had nothing to do with either the Japanese Diet or the U.S. Congress. Through an intermediary, a Lexus dealer, I dealt with Toyota Motor Corporation.

While it might be convenient to speak of one country trading with another, such aggregation can conceal a lot of evil, particularly when people call for trade barriers. For example, what would be a moral case for third-party interference, by either the Japanese Diet or the U.S. Congress, with an exchange between me and Toyota Motor Corporation?

Some might reason that since Japan places restrictions on U.S. products entering their country, an appropriate retaliatory measure is not to allow Japanese products to freely enter the U.S. Consider that Japanese protectionist restrictions on rice imports force Japanese consumers to pay three or four times the world price for rice. How much sense does it make for Congress to retaliate against Japan by imposing restrictions on their products thereby forcing American consumers, say Lexus buyers, to pay higher prices? Should our rule be: If one country screws its citizens we should retaliate by screwing our citizens?

~George Mason economist Walter Williams

MP: It's a simple, but overlooked point: Countries don't trade, individual American consumers make voluntary decisions to buy products produced by foreign companies (e.g. check the country of origin on the tags/labels on your clothes), and individual American businesses voluntarily buy from, and sell to, foreign firms and consumers. Most of the discussion about trade focuses on aggregate trade statistics at the "country level," like reports of a $56.5 billion U.S. trade deficit in September, a $700 billion U.S. trade deficit for 2007, a $195 trade deficit with China this year, or a $14 billion trade surplus with the Netherlands this year.

Like Walter Williams points out, those aggregate trade data can disguise the fact that it was individual American consumers and businesses making voluntary decisions on buying and selling products every day that result in some country-level trade deficit or surplus when trade data between the U.S. and other countries is aggregated at the end of a month, quarter or year.

Bottom Line: People trade, not countries. Therefore, any restrictions on trade in the form of protectionism hurt American people, i.e. U.S. consumers, and the workers and shareholders of U.S. businesses. A tariff on Japanese-made products is not a tariff on the country of Japan,it is really a tax on American consumers and businesses who voluntarily decide to buy products made by Japanese producers.

16 Comments:

At 11/28/2008 10:32 AM, Anonymous Anonymous said...

Makes sense. Until one puts up his own money to start a venture, say with self-funded proprietary technology, only to have said technology knocked off by a foreign competitor and resold in the US (for example). Obviously the foreign company incurred zero technological or financial risk, but they get the reward.

It IS our elected officials responsbility to ensure a FAIR playing field in my opinion.

Imagine how much less progress we've had with new technology due to the real threat of knockoff's and simply unfair trade practices.

 
At 11/28/2008 11:07 AM, Blogger Bruce Hall said...

It's not the cocaine that kills, its the people who inject it into themselves....

Countries don't trade, but governments facilitate trade through treaties that are either enforced or not.

When you go to the store to purchase an item, you probably don't look at the country of origin. You don't look for the "made with child labor" label. You don't read the "prices kept low through currency manipulation" disclaimer. You don't read the part of the owner's manual that tells you "designed by carefully copying quality products."

Individuals do NOT engage in trade... well, 99.9999% don't... they purchase available products. Small businesses do NOT engage in trade... they purchase available products from suppliers. Large corporations with resources to specifically source as they want DO engage in trade. Governments that award contracts based on price DO engage in multinational sourcing... DO engage in trade.

Your homily is simply incorrect... even though it is the gospel of the economists.

 
At 11/28/2008 12:27 PM, Blogger Luther said...

What if the country of origin provides subsidies to its industries that place the same industry in our country at at major disadvantage. For example, lumber in Canada is manufactured from subsidized timber prices which are much lower. In the US, most timber is purchased in the open market. Canadian lumber manufacturers have an distinct advantage over US lumber manufacturers do to government subsidies.

 
At 11/28/2008 12:42 PM, Blogger qi said...

to Bruce Hall
I suggest you to read any version of ....principles of economics, then you;ll know why trade with each other makes both sides better off and so tariff is to obstacle free trading because of the political pressure from interest group(such as domestic suppliers)

just a simple stance to clear the logic here:

if we should impose tax between countries then why not states?

 
At 11/28/2008 12:59 PM, Blogger qi said...

to luther:
aha,so nice Canadians ,they subsidize timber industry so that you Americans can get a much lower price

how wonderful!
you American consumers get welfare paid by Canada ,then why not just take it

yeah ,the American timber industry may be hurt, but the overall welfare increase

 
At 11/28/2008 2:58 PM, Anonymous Michael Smith said...

Anonymous said:

Makes sense. Until one puts up his own money to start a venture, say with self-funded proprietary technology, only to have said technology knocked off by a foreign competitor and resold in the US (for example). Obviously the foreign company incurred zero technological or financial risk, but they get the reward.

You have the option of seeking a patent on the proprietary technology to avoid this problem.

 
At 11/28/2008 4:39 PM, Anonymous Michael Smith said...

Bruce Hall wrote:

When you go to the store to purchase an item, you probably don't look at the country of origin. You don't look for the "made with child labor" label. You don't read the "prices kept low through currency manipulation" disclaimer. You don't read the part of the owner's manual that tells you "designed by carefully copying quality products."

Individuals do NOT engage in trade... well, 99.9999% don't... they purchase available products.

Every purchase is a trade -- an exchange of money for a product or service. The fact that I don't know the country of origin of the product does not alter the fact that I've traded for that product.

Nor does the fact that the product passed through an intermediary like Walmart change anything either. Walmart's purchasing agents would not have bought the product except for the knowledge that I (or some other customer) was ultimately willing to purchase it.

So Williams and Perry's point remains valid: people and businesses trade, not countries.

 
At 11/28/2008 5:21 PM, Blogger Colin said...

Great column. Trade restrictions are an infringement on my freedom allowing to choose who I want to trade with. Funny how it is primarily those on the left that love to brag about how they are citizens of the world that become so fiercely nationalistic on trade matters.

 
At 11/28/2008 6:01 PM, Anonymous qt said...

Anon. 10:32,

There are plenty of examples of non-foreign companies who copy proprietary technology as well as American companies who rip off ideas from other countries (Say American champagne?).

The generic drug makers do exactly the same thing taking advantage of years of R&D by pharmaceutical companies. Can also recall lawsuits against Microsoft copying the MAC gewy. There's even a new movie out about Bob Kearns whose invention of the windshield wiper was pirated by the Big 3 who refused for years to compensate him.

There aren't too many unique ideas so they tend to copied. That's a reality that every businessman understands.

I guess that's why we don't have to go to Mexico to get a caesar salad or Cuba to get a daquiri.

 
At 11/28/2008 6:21 PM, Anonymous qt said...

"You don't look for the "made with child labor" label. "

You seem blissfully unaware that child labour existed in the U.S. well into the 20th century. Child labour is a necessity in many developing countries due to one single factor...poverty.

Not everyone has the living standard of the U.S. Many people still eake out a living on less than $1 a day.

Picking coffee with your family, cutting the smallest diamonds in the world or making a carpet look pretty good when compared with the alternative, child prostitution.

 
At 11/28/2008 8:37 PM, Blogger Pete Murphy said...

Our enormous trade deficit is rightly of growing concern to Americans. Since leading the global drive toward trade liberalization by signing the Global Agreement on Tariffs and Trade in 1947, America has been transformed from the weathiest nation on earth - its preeminent industrial power - into a skid row bum, literally begging the rest of the world for cash to keep us afloat. It's a disgusting spectacle. Our cumulative trade deficit since 1976, financed by a sell-off of American assets, is now approaching $9 trillion. What will happen when those assets are depleted? Today's recession may be just a preview of what's to come.

Why? The American work force is the most productive on earth. Our product quality, though it may have fallen short at one time, is now on a par with the Japanese. Our workers have labored tirelessly to improve our competitiveness. Yet our deficit continues to grow. Our median wages and net worth have declined for decades. Our debt has soared.

Clearly, there is something amiss with "free trade." The concept of free trade is rooted in Ricardo's principle of comparative advantage. In 1817 Ricardo hypothesized that every nation benefits when it trades what it makes best for products made best by other nations. On the surface, it seems to make sense. But is it possible that this theory is flawed in some way? Is there something that Ricardo didn't consider?

At this point, I should introduce myself. I am author of a book titled "Five Short Blasts: A New Economic Theory Exposes The Fatal Flaw in Globalization and Its Consequences for America." My theory is that, as population density rises beyond some optimum level, per capita consumption begins to decline. This occurs because, as people are forced to crowd together and conserve space, it becomes ever more impractical to own many products. Falling per capita consumption, in the face of rising productivity (per capita output, which always rises), inevitably yields rising unemployment and poverty.

This theory has huge ramifications for U.S. policy toward population management (especially immigration policy) and trade. The implications for population policy may be obvious, but why trade? It's because these effects of an excessive population density - rising unemployment and poverty - are actually imported when we attempt to engage in free trade in manufactured goods with a nation that is much more densely populated. Our economies combine. The work of manufacturing is spread evenly across the combined labor force. But, while the more densely populated nation gets free access to a healthy market, all we get in return is access to a market emaciated by over-crowding and low per capita consumption. The result is an automatic, irreversible trade deficit and loss of jobs, tantamount to economic suicide.

One need look no further than the U.S.'s trade data for proof of this effect. Using 2006 data, an in-depth analysis reveals that, of our top twenty per capita trade deficits in manufactured goods (the trade deficit divided by the population of the country in question), eighteen are with nations much more densely populated than our own. Even more revealing, if the nations of the world are divided equally around the median population density, the U.S. had a trade surplus in manufactured goods of $17 billion with the half of nations below the median population density. With the half above the median, we had a $480 billion deficit!

Our trade deficit with China is getting all of the attention these days. But, when expressed in per capita terms, our deficit with China in manufactured goods is rather unremarkable - nineteenth on the list. Our per capita deficit with other nations such as Japan, Germany, Mexico, Korea and others (all much more densely populated than the U.S.) is worse. My point is not that our deficit with China isn't a problem, but rather that it's exactly what we should have expected when we suddenly applied a trade policy that was a proven failure around the world to a country with one fifth of the world's population.

Ricardo's principle of comparative advantage is overly simplistic and flawed because it does not take into consideration this population density effect and what happens when two nations grossly disparate in population density attempt to trade freely in manufactured goods. While free trade in natural resources and free trade in manufactured goods between nations of roughly equal population density is indeed beneficial, just as Ricardo predicts, it’s a sure-fire loser when attempting to trade freely in manufactured goods with a nation with an excessive population density.

If you‘re interested in learning more about this important new economic theory, then I invite you to visit my web site at OpenWindowPublishingCo.com where you can read the preface, join in the blog discussion and, of course, buy the book if you like. (It's also available at Amazon.com.)

Please forgive me for the somewhat spammish nature of the previous paragraph, but I don't know how else to inject this new theory into the debate about trade without drawing attention to the book that explains the theory.

Pete Murphy
Author, "Five Short Blasts"

 
At 11/28/2008 10:15 PM, Blogger @sethstorm said...

What to say about practical choice when the only real options presented to you are foreign junk or nothing at all?

 
At 11/29/2008 12:56 AM, Blogger Bruce Hall said...

For those who wish to equate purchases at a local store with arranging for large volumes of goods to be brought in from other countries for distribution, sale, or incorporation into a larger product/assembly, then I concede the concept that individuals trade. But beyond such superfluous and meaningless comparisons, the argument is specious.

Qi, trade does not necessarily enrich all. The Chinese, for example, have siphoned billions... perhaps trillions... of dollars from U.S. companies through intellectual theft... THEFT. You can call that trade if you wish, but counterfeiting and intellectual property theft is just another form of Barbary pirating.

Economists want to view the world through "principles" of trading and thereby lose credibility with those who truly understand the actual interchanges.

Now, if placing boundaries around what is considered acceptable is "an infringement on my freedom allowing to choose who I want to trade with," perhaps your freedom should be re-examined.

Going back to the original point; individuals make purchases or exchange their labor or knowledge for payment... a micro form of "trade" in a loose semantic way. But trade, in the sense of transactions impacting nations, is far upstream of those individual purchase which are "an infringement on my freedom allowing to choose who I want to trade with" by driving out of business through unethical practices [by our standards and laws] those local and national businesses with whom they compete.

But you might save a buck at Wal-Mart as a result.

 
At 11/29/2008 3:14 AM, Blogger Domino said...

Tariffs that enforce "fair" trade may hurt the American consumer (in so far as the price they pay for a product) but that is often the price of higher safety standards, a middle class wage, and environmental regulations (all things that improve our standard of living). It strikes me as odd that conservative economists always fall to the same fallacy; they look at the monetary benefits while ignoring the external benefits. I don't think we should protect our domestic workers from more efficient or higher quality competition. We do have a duty to protect our workers from foreign goods that are more efficient due to the laws we've passed making domestically produced products less efficient relative to the global market.

Cheaper isn't always better. But I suppose that isn't the point of the article. Tariffs aren't in of themselves intrinsically evil, they could after all protect a job "worth protecting". The question is: when are they worth protecting?

 
At 11/29/2008 4:21 PM, Anonymous Anonymous said...

Trade in the short term should always benefit both parties to the trade.

Over the longer term, though, it's quite possible for trade to be detrimental to one party (typically the party with the greater initial advantage).

The mechanism is easy to understand: have one party sell the other party "capital equipment" that improves the other party's productivity; improving the other party's productivity will, ceteris paribus, reduce the strength of the first party's negotiating position when it's time to divide the trade surplus.

Simple example: USA can produce cars well, but rice poorly; China produces rice well, but cars very poorly.

Makes sense for USA to focus on cars and China to focus on rice.

Let's use nice round numbers and say that:
- USA focusing on cars can make 100 cars
- China focusing on rice can make 100 rice
- USA doing both makes 70 cars and 20 rice
- China doing both makes 70 rice and 20 cars

So, focusing-and-trading is beneficial to both parties:
- there's 100 cars and 100 rice to go around, instead of 90 cars and 90 rice

And, we can speculate about how many cars and how much rice each party is going to get
- USA isn't going to accept a trade offer that'd leave it with fewer than 70 cars and 20 rice*
- China isn't going to accept a trade offer that'd leave it with fewer than 70 rice and 20 cars*

So, taking the USA's side here, the USA expects to see between 70-80 cars and 20-30 rice, depending on how good it is at negotiating.

Now, suppose that I start selling China some capital equipment that'll help it make cars better.

After I've sold China that equipment, China now could make 70 rice and 25 cars, instead of 70 and 20 like before.

Assuming nothing else has changed, then, it's still the case that it's beneficial for both parties to trade -- there's 100 cars and 100 rice to go around, instead of 90 and 95 -- but what kind of deal will the USA be able to cut?

The USA is now going to expect to see 70-75 cars and 20-30 rice, instead of 70-80 cars like before. -- China's improved productivity means China can drive a harder bargain.

This is the mechanism by which over a long term it's possible for trade to leave one party worse off.

All that is required is for capital to be a tradable good, and for productivity to be a function of accumulated capital (not some a priori fixed attribute like in your classical Ricardian "england is better at raising sheep, portugal is better at making wine" kind of scenario).

Neither the assumption that capital is a tradable good nor the assumption that productivity is a function of accumulated capital seems terribly outlandish.

 
At 12/11/2008 2:44 AM, Blogger joshua said...

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