Monday, December 05, 2011

Exports and Imports Are Flip Sides of Same Coin; Therefore A Tax on U.S. Imports Is a Tax on Exports


In a short pamphlet from the American Enterprise Institute titled "Three Simple Principles of Trade Policy," Dartmouth economist Douglas A. Irwin writes this about his first simple principle, "A Tax on Imports is a Tax on Exports":

"Any restraint on imports also acts, in effect, as a restraint on exports. If a government undertakes policies that systematically  reduce the volume of imports, it also systematically reduces the volume of exports. The converse of this proposition is also true: when a government undertakes policies to expand the volume of exports, it cannot help but to expand the volume of imports as well.

The fundamental reason for this truth is that exports and imports are flip sides of the same coin.  Exports are necessary to generate the earnings to pay for imports, or exports are the goods a country must give up in order to acquire imports.  Exports and imports are inherently interdependent, and any policy that reduces one will also reduce the other."  

MP: The chart above provides historical data on U.S. international trade (annual exports and imports in log form) from 1790 to 2011 that confirm the strong statistical correlation between exports and imports over the last 221 years - they are inextricably linked and interdependent.  It follows from Irwin's First Simple Principle of Trade Policy that:

1. Trade policies that attempt to stimulate exports simultaneously stimulate imports. Although he probably doesn't understand or recognize this, Obama's plan to double exports over the next five years will simultaneously double imports over the next five years.

2. Attempts to tax (impose tariffs on) imports to protect domestic industries and increase jobs and exports in that industry will backfire because the tax on imports will simultaneously be a tax on U.S. exports, and there might actually be an overall decrease in employment. 

The history of U.S. trade policy is based on the illusion that exports and imports are determined, or can be influenced, independently, since trade policy is almost always targeted at either decreasing imports or expanding exports, e.g. Obama's plan to double exports.   But the reality is that exports and imports are dependent, determined simultaneously, and they rise and fall together.

3. This type of nitwitery will never work to create new U.S. jobs:

"World News with Diane Sawyer" is gearing up for a "Made in America Christmas" and we need your help. The average American will spend $700 on holiday gifts and goodies this year, totaling more than $465 billion, the National Retail Federation estimates. If that money was spent entirely on U.S. made products it would create 4.6 million jobs. But it doesn't even have to be that big. If each of us spent just $64 on American made goods during our holiday shopping, the result would be 200,000 new jobs."

According to the First Simple Principle, reducing spending on imported Christmas gifts this year will simultaneously reduce spending on U.S. exports, and to the extent that any new jobs are created in some U.S. industries, they will be offset by job losses in other industries. No matter how successful the "Made in America Christmas" campaign is at increasing sales of American-made products, it won't create a single new American job, on net.  

13 Comments:

At 12/05/2011 10:53 PM, Blogger Benjamin said...

By this reasoning, mainland China should have a negative GDP.

Why do Asian export-oriented economies roar ahead, if exports are not a key to growth?

I do wonder about one aspect of trade: Other nations accept US money as payments. We have a reserve currency. We print money. Ergo, we get goods and they get slips of paper (ultimately US bonds).

This reality also raises question of the "supply side" arguments. If the "supply side" is global, and we can print money and bring goods, services and labor here, then what does the "supply side" really mean? Why worry about the domestic "supply side" if we can print money and use the global supply side?

I have never heard any "free trader, supply sider" answer these really annoying questions.

Moreover, capital flows here easily as well.

We just gotta keep printing money to keep the global economy going, and to keep our standard of living very, very high.

 
At 12/06/2011 5:39 AM, Blogger Duncan said...

It all comes down to production. Hazlett sums it all up in one line, we can only distribute what is produced, that meaning jobs, products and services, savings, investment the ability to import or export. The asian miracles of the past and present were production miracles by massive increases in productivity

 
At 12/06/2011 6:28 AM, Blogger Larry G said...

I find it interesting that Presidential Candidate advocating Romney... a free-trade advocate treads very close to trade sanctions against China for it's currency manipulation.

 
At 12/06/2011 9:49 AM, Blogger morganovich said...

"1. Trade policies that attempt to stimulate exports simultaneously stimulate imports"

this seems like a questionable premise.

currency manipulation does nothing of the sort. it stimulates exports while inhibiting imports.

 
At 12/06/2011 9:49 AM, Blogger morganovich said...

"We just gotta keep printing money to keep the global economy going, and to keep our standard of living very, very high."

oh yeah, that worked like a charm in weimar, zimbabwae, argentina, and everywhere else it was tried.

you have to be kidding.

 
At 12/06/2011 11:02 AM, Blogger Buddy R Pacifico said...

" Trade policies that attempt to stimulate exports simultaneously stimulate imports."

This must be a specific to the U.S., because China, Germany, Japan and others have not been subject to this symmetry.

Please note, that for the seventeen countries the U.S. has Free Trade agreements with, that symmetry is skewed to exports for America. Why is that?...

Because Free Trade Agreements eliminate non-tariff barriers that previously might have been imposed on U.S. exports. Also, Intellectual Property rights protections are more likely observed and enforced with FTAs.

 
At 12/06/2011 1:42 PM, Blogger arbitrage789 said...

This comment has been removed by the author.

 
At 12/06/2011 1:44 PM, Blogger arbitrage789 said...

“Exports are necessary to generate the earnings to pay for imports… Exports and imports are inherently interdependent…”

“Attempts to tax imports to protect domestic industries … will simultaneously be a tax on U.S. exports”
_____________

Certainly exports and imports are interdependent. But if we make the simplifying assumption that our trading partners will not retaliate if we impose tariffs (a dubious proposition, I realize), then I don’t think it’s necessarily true that taxing imports will lead to an equal tax on U.S. exports.

The other factor that’s missing from this is the currency exchange rates. A lower US dollar would benefit exporters, but make imports more expensive. (A lower US dollar will make the US less wealthy over time).

I’m not in favor of imposing tariffs on imported goods. But at the same time, I think that if we make the (rather dubious) assumption that our trading partners will not retaliate for the imposition of the tariffs, then it follows that employees within certain industries would indeed benefit from tariffs on imports that compete with the products that they produce.

 
At 12/06/2011 2:11 PM, Blogger Larry G said...

I note that some companies have moved their manufacturing to THIS country even though labor costs are probably higher.

why did Toyota.. Hyundai and others move their manufacturing here instead of importing?

Nowdays.. many Toyota models have more American made parts in them than Chevy's.

 
At 12/06/2011 3:39 PM, Blogger arbitrage789 said...

Larry G.,

Auto manufacturers represent a special case, due to the limits on imports.

 
At 12/06/2011 8:25 PM, Blogger Walt G. said...

Larry G,

It was very cost effective for the Japanese automakers to set up in the United States because of free land, infrastructure, and free training for employees provided by mostly Southern states. In many cases, bidding wars broke out between the states to lure the automakers in. GM and Chrysler are not the only automakers using taxpayer money to fund their operations.

 
At 12/06/2011 9:14 PM, Blogger VangelV said...

Why do Asian export-oriented economies roar ahead, if exports are not a key to growth?

People work hard and are increasing their productivity. The problem is that they are not growing as much as they could because they waste resources by subsidizing Western consumers. But the last time I checked that was not a problem.

 
At 12/07/2011 11:15 AM, Blogger anonymous said...

I think it's interesting to note the relatively huge export surplus during the "Great Depression". Negating a trade deficit does not a strong economy make.

 

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