Quote of the Day: Trade is Not a Scoreboard

We need to do better a job explaining how trade does not lend itself to sports metaphors. Exports are not our “points.” Imports are not “their” points. The trade account is not a scoreboard. It is not Team America against the world. Trade is about mutually beneficial exchange between individuals in different political jurisdictions, and to the extent that those kinds of transactions are subject to the whims of politicians, more and more resources will be diverted from economic to political ends.

This is from Cato Institute director Daniel Ikenson debunking mercantilist myths

Quote of the Day: Global Competition is the 21st Century Reality

instead of pursuing a 20th century trade policy model that seeks to secure market-access advantages for certain producers, policy should be recalibrated to reflect the 21st century reality that governments around the world are competing for business investment and talent, which both tend to flow to jurisdictions where the rule of law is clear and abided; where there is greater certainty to the business and political climate; where the specter of asset expropriation is negligible; where physical and administrative infrastructure is in good shape; where the local work force is productive; where there are limited physical, political, and regulatory barriers, etc. This global competition in policy is a positive development because — among other reasons — its serves to discipline bad government policy.

That’s from Daniel Ikenson at the Cato Institute.

How Foreign Trade Restrictions Obstructs Economic Growth

In discussing the official complaint filed by the US at the World Trade Organization (WTO) against China’s rare earth export restrictions, Cato’s Dan Ikenson explains the adverse implications of trade restrictions. Mr. Ikenson writes, (bold emphasis mine)

USTR’s argument against Chinese export restrictions in the raw materials and Rare Earths cases are just as applicable to U.S. import restrictions. Removing restrictions—whether the export variety imposed by foreign governments or the import variety imposed by our own—reduces input prices, lowers domestic production costs, enables more competitive final-goods pricing and, thus, greater profits for U.S.-based producers.

Yet the U.S. government imposes its own restrictions on imports of some of the very same raw materials. It maintains antidumping duties on magnesium, silicon metal, and coke (all raw materials subject to Chinese export restrictions). In fact, over 80 percent of the nearly 350 U.S. antidumping and countervailing duty measures in place restrict imports of raw materials and industrial inputs—ingredients required by U.S. producers in their own production processes. But those companies—those producers and workers for whom Ambassador Kirk professes to be going to bat in the WTO case on rare earths (and the previous raw materials case)—don’t have a seat at the table when it comes to deciding whether to impose AD or CVD duties. (Full story here.)

Ambassador Kirk’s logic and the facts about who exactly is victimized by U.S. trade policies provide a compelling case for trade law reform, such as requiring the administering authorities to consider the economic impact of AD/CVD measures on producers in downstream industries—companies like magnesium-cast automobile parts producers, manufacturers of silicones used in solar panels, and even steel producers, who require coke for their blast furnaces.

Feel good protectionist policies does the opposite of what they intend to accomplish

Yet such policies have been imposed by vested interest groups, who uses the law (in cahoots with vote seeking politicians) to protect their economic standings at the expense of consumers and of the society. This is known as Rent Seeking.

Trade restrictions has significant direct and indirect (unseen spillover) impact to the economy.

Despite Globalization, US Still a ‘Closed’ Economy

Some important figures from Cato’s Dan Ikenson

-Despite globalization, the U.S. economy “actually remains relatively closed.” (By “relatively closed,” the authors mean that imports are puny compared to the size of the economy—not that U.S. policies are relatively restrictive of imports.)

-The vast majority of goods and services purchased by U.S. consumers (88.5%) is produced in the United States

-When accounting for the value of foreign content in final U.S. production of goods and services, 86.1% of U.S. consumer purchases of goods and services is produced in the United States.

-Of the 11.5% of total U.S. consumer spending on imports, 64% accounts for the goods and services produced abroad and 36% accounts for transportation, wholesaling, retailing and other activities performed in the United States.

-Only 2.7% of U.S. consumer spending is devoted to goods labeled “Made in China.”

-Of the 2.7% of U.S. consumer spending on imports from China, only 45% is for the foreign-produced good and 55% goes to transportation, wholesaling, retailing, and other activities performed in the United States. In other words, $.55 of every dollar spent on imports from China directly supports economic activity in the United States.

This Cato paper gives broader perspective to the findings of the aforementioned studies.

Added thoughts:

US trade with the world has been less than 20% of the world’s GDP. Given the heft of the US economy, this low % has brought down the average % of world trade. In other words, many nations have merchandise exports at vastly over 50% of their respective GDPs.

Chart from Google Public Data

The popular anti-trade mercantilist rhetoric about China’s significance (or usurping jobs and trade) has been vastly exaggerated. This only exposes politicians, who advocate protectionism, are engaged in the power of suggestion to dupe gullible masses.

Another way to look at this is that for the US economy to have a stronger recovery, she has to open her trading doors wider to the world, instead of using the printing press which only diverts resources to politicians and their allies and cronies.

In short, there is immensely more room for genuine and sound economic growth via free trade.

10 Economic Reasons Why Trade Is Beneficial

Cato’s Dan Ikenson improves on U.S. Chamber of Commerce John Murphy’s list of the top 10 reasons why trade is good trade for America.

Below is John Murphy’s list along with Mr. Ikenson’s enhancements (bold highlights original) [from Cato.org Blog]

1. The United States is the number one manufacturing nation in the world, and that success depends on exports. And since over half of the total value of U.S. imports consists of “intermediate goods” (products that are used as inputs for further value-added activity), manufacturing success also depends on imports.

2. The United States is the world’s number one services exporter and has been since services trade data have been tracked. And one of the reasons that foreigners are able to purchase American services is because they have been able to earn dollars by selling goods to American businesses and consumers.

3. U.S. agricultural exports support nearly a million jobs in the United States. And, agricultural and manufactured imports have made life’s necessities and conveniences more affordable to hundreds of millions of Americans.

4. 95 percent of the world’s consumers lives outside the United States…as do 95 percent of the world’s workers, who produce many of the goods Americans consume as imports less expensively than Americans can, freeing up U.S. resources for investment, innovation, and consumption of the higher value products and services that Americans produce.

5. FTA countries purchased more than 40 percent of U.S. exports in 2009. And imports from those countries have helped extend families’ budgets and reduced the costs of production for U.S. business relying on inputs from those countries.

6. Since the creation of the WTO in 1994, U.S. exports of goods and services have doubled to more than $1.5 trillion. And real U.S. GDP has increased by 50 percent.

7. Imports support millions of U.S. jobs in retail, research, design, sourcing, transportation, warehousing, marketing and sales…and in manufacturing.

8. U.S. exports to China have quadrupled over the past 15 years, and China is now the 3rd largest market for U.S. exports. And U.S. imports from China, too often wrongly portrayed as evidence of U.S. profligacy or decline, have enabled U.S. industries that require access to lower-cost labor for economic viability to be born, to blossom, and to spark the advent of new products and industries.

9. U.S. companies with overseas investments account for 45 percent of all U.S. exports. And foreign companies operating in the United States employ 5.6 million Americans, support a payroll of $408.5 billion, provide compensation that is 33% higher than the U.S. average, account for 18% of U.S. exports, pay U.S. taxes, support local charities, and act as investment magnets in communities across the country.

10. Trade supports 38 million jobs in the United States–more than one in five American jobs. And most Americans enjoy the fruits of international trade and globalization every day: driving to work in vehicles containing at least some foreign content; talking on foreign-made mobile telephones; having extra disposable income because retailers like Wal-Mart, Best Buy, and Home Depot are able to pass on cost savings made possible by their own access to thousands of foreign producers; eating healthier because they now can enjoy fresh imported produce that was once unavailable out-of-season, etc.

Additional comments:

Of course trade IS NOT only good for the US, but FOR THE WORLD. Note that 95% of the world’s consumers and workers reside outside America!

In addition, foreign trade SHOULD NOT be seen or interpreted in isolation.

Instead, what must be understood is that the market represents a process where consumers and producers (and service providers) are vastly interdependent with each other and whose activities are coordinated through the price mechanism.

The great Professor Ludwig von Mises calls this connexity. He wrote, (all bold highlights mine)

What links together in our actual world the various fields of want-satisfaction is the existence of a great many nonspecific factors, suitable to be employed for the attainment of various ends and to be substituted in some degree for one another. The fact that one factor, labor, is on the one hand required for every kind of production and on the other hand is, within the limits defined, nonspecific, brings about the general connexity of all human activities. It integrates the pricing process into a whole in which all gears work on one another. It makes the market a concatenation of mutually interdependent phenomena.

It would be absurd to look upon a definite price as if it were an isolated object in itself. A price is expressive of the position which acting men attach to a thing under the present state of their efforts to remove uneasiness. It does not indicate a relationship to something unchanging, but merely the instantaneous position in a kaleidoscopically changing assemblage. In this collection of things considered valuable by the value judgments of acting men each particle's place is interrelated with those of all other particles. What is called a price is always a relationship within an integrated system which is the composite effect of human valuations.

This means that foreign trade is highly interrelated with domestic trading activities.

Thus, trade data shouldn’t be seen only in the light of either foreign or local but should account for both.

Looking at trade in different prisms would only stimulate the misimpression that trade operates on a closed framework, a false fodder for anti-trade exponents or the protectionists.