Friday, August 17, 2007

Ignore Those Who Complain of Trade Imbalances

As a general rule of thumb, experience has taught me that anytime somebody talks about an "imbalance in trade," or says they support "fair trade" instead of "free trade," it's pretty much guaranteed that either: a) they really don't know what they're talking about and don't really understand international trade, and/or b) they have told only a partial, incomplete story about trade. In either case, it would be a pretty good assumption that you can safely dismiss and ignore their comments.

Or as George Mason economist Don Boudreaux advises today in Cafe Hayek, "ignore anyone who complains that trade is "imbalanced." I have never encountered any such complaint that makes even a whiff of economic sense."

Professor Boudreaux is responding to complaints by UAW President Ron Gettelfinger's in yesterday's WSJ that "the U.S. and South Korea have a huge imbalance in auto trade."

As Don points out, GM and Ford have HUGE "trade imbalances" with their workers, just like most of us have with all of our employers (they buy more of our labor services than we buy of their products or services), and just like the "trade imbalances" most of us have with our dry cleaners, grocery stores, restaurants, cell phone companies, gas stations, banks,, Starbucks, etc. (we buy more from them than they buy from us).

Bottom Line: Any time somebody uses terms like "fair trade," or "trade imbalances," be extremely skeptical of what follows, because it will almost always be some kind of protectionist trade policy (e.g. tariffs on imports) to "balance trade" and make it more "fair."


At 8/17/2007 7:05 PM, Blogger juandos said...

Well now it seems that George Mason is a breeding ground for some very smart economists...

Note what another George Mason star has to say about trade deficits: Dr. Walter Williams says: "I buy more from my grocer than he buys from me, and I bet it's the same with you and your grocer. That means we have a trade deficit with our grocers. Does our perpetual grocer trade deficit portend doom? If we heeded some pundits and politicians who are talking about our national trade deficit, we might think so. But do we have a trade deficit in the first place? Let's look at it" ( there is more Williams wisdom )

At 8/17/2007 8:54 PM, Blogger happyjuggler0 said...

There is also this article by Tim Harford entitled A trade deficit with a babysitter.

Here is a partial quote, noting that Sally is his babysitter: Family Harford runs a substantial bilateral trade deficit with Sally. A bilateral trade deficit is what you spend with a particular trading partner, less what you earn from them. We spend $100 a week on service exports from Sally, and we earn nothing at all from her. That’s a yawning bilateral trade deficit, but we’re happy enough with it.

If politicians were in charge of Family Harford trade policy they would bully Sally to raise her hourly rates, so that trade would take place on a “fairer” basis. The politicians in charge of Sally’s trade policy would refuse.

Boggled already? You should be. But this matches perfectly the state of US-China trade relations: China keeps selling cheap stuff to the US, the US isn’t selling so much to China (but plenty to other parts of the world). The Americans are demanding that the Chinese charge more, and the Chinese are refusing.


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