This TGIF (now slightly modified) first appeared February 23, 2007. In light of the controversy over job outsourcing and Chinese-made Olympic clothing, it is especially relevant today.
The Commerce Department (whose idea was that?) routinely reports on the U.S. trade deficit–that is, the amount by which the dollar value of American imports exceeds the dollar value of American exports. China’s trade surplus with the United States is of special concern to many people.
Ordinarily, I ignore this monthly nonstory because, as Adam Smith wisely said, “Nothing . . . can be more absurd than this whole doctrine of the balance of trade.” And how many times must it be pointed out that the current-account deficit is a mirror image of the capital-account surplus?
But in thinking about trade deficits and the Smith quote, I’ve come away with a new appreciation of what the old Scotsman was saying. Concern about imports and exports really is ridiculous.
Exports and Imports
What is an export? What is an import? These words are defined in reference to political boundaries of only one kind: national boundaries. If there were no such boundaries, there would be no exports or imports. But political boundaries are just that. They are not economic boundaries. To the extent that they can, people go about their business as though those boundaries weren’t there. People cross the Canadian-American and Mexican-American borders to transact business every day. If they give them a thought it is only because governments put up barriers patrolled my armed guards who make them wait in line. People learn early in life that they can gain immensely from trade, and with that understanding comes the insight that it doesn’t much matter on which side of a Rand-McNally line your trading partner lives.
So the very concepts imports and exports are founded on an arbitrary construct that has little practical consequence for people’s economic activities. Back in the 1980s, when neomercantilists feared Japan’s economic success at selling us stuff (seems a little crazy now, no?), I used to ask what would happen to the trade deficit if Japan were made the 51st state. Obviously, the deficit would have disappeared because we don’t reckon trade imbalances between states. Why not?
In reality there are no imports and exports. From my point of view, there is only what I make and what everyone else makes. It’s the same for everyone else. Few people would want to live just on what they themselves could make. Frédéric Bastiat pointed out that each of us daily uses products we couldn’t make in isolation in a thousand years. Talk about poor, solitary, nasty, brutish, and short! What makes this phenomenon stranger still is that the same thing holds true for all men, Bastiat wrote. Every one of the members of society has consumed a million times more than he could have produced; yet no one has robbed anyone else.
This is just another way of saying that the case for free trade is conceded the moment someone eschews self-sufficiency. After that, we’re just haggling over the size of the trade area. But if free trade (read: division of labor) is good, then the bigger the free-trade area the better. Globalization should be the worldwide removal of all barriers to the exchange of goods and services — rather than trade managed through state capitalism and multinational bureaucracies. Unilateral, unconditional free trade is the smartest policy.
There’s another way to illustrate the emptiness of the words imports and exports. This was delightfully done in a 2007 lecture given by the late Sudha Shenoy, an economist of the Austrian school who was long associated with the University of Newcastle, Australia. Shenoy showed that in a global economy, specifying where goods are made can be tricky.
Take China, for example, which keeps today’s neomercantilists up at night. Why? Because it has a big trade surplus with the United States. The Chinese do sell us a lot of clothing and other textile products. But what do we mean when we say something is “Made in China.” Perhaps not what we think we are saying.
Shenoy emphasizes that Chinese workers do the final assembly of many products, but final assembly is but the tip of the iceberg of production. When you look at the full manufacturing process, you find a system of worldwide cooperation. Most of the materials and machines the Chinese use in assembly were made somewhere else: sewing machines in Japan, Korea, and the United States; dyes in Germany; button-making machinery in the United States, Taiwan, and Hong Kong; zippers in Japan; spinning and weaving machinery in the United Kingdom; raw cotton in Uzbekistan, Egypt, and the United States (subsidized by the government); cotton gins in the United States; and steel in Japan and Korea.
Once assembled, the goods have to be moved to the docks for transport to the United States. The trucks that do the moving are made in Japan. The ships and containers are made in Korea, Japan, America, and Britain. The shipping services are Greek and Norwegian.
“When you read a label which says ‘made in China,’ it is not made in China,” Shenoy says. “It is made by the world economy, by the globe as a whole. . . . It is impossible to make anything in one country. And that is why, as Mises pointed out, the market economy does not respect political frontiers. Its field is the world.”
Shenoy’s point is reinforced by economist Tyler Cowen of George Mason University. The neomercantilists blame China’s trade surplus on its policy of keeping the yuan undervalued against the dollar. But Cowen argues that if that policy were to stop, it might not make much difference. Since China has to import parts in order to manufacture its exports (it runs a trade deficit with East Asia), the stronger yuan would enable the Chinese to buy imported components and materials at lower cost. Thus the price of Chinese goods in the United States might not change much, and Americans would still eagerly buy them up.
Cowen also destroys the notion that China is draining the United States of money:
Most of the growth in Chinese exports to the United States has come from switching manufacturing and assembly from other, more expensive, Asian countries. In 1985, China, Japan, Hong Kong, Taiwan and South Korea accounted for 52.3 percent of America’s trade deficit. By 2005, this percentage had fallen to 40.9 percent, in part because of cost savings from buying Chinese.
From 1986 to 1988, Taiwan and South Korea accounted for 60 percent of American footwear imports; China was only 2 percent. By 2001, market positions had reversed; China produced about 60 percent of the total and Taiwan and South Korea about 2 percent.
In other words, Americans are substituting Chinese goods not for American-made goods but for higher-priced Asian goods.
There is no question that we have more stuff, a larger variety, and lower prices thanks to the expansion of world trade. This does not mean all is well in the developing nations. There’s little laissez faire out there–or here–sorry to say. But the remedy is not to harm consumers by closing our market. A better strategy is to strip the ruling elites of their State privileges.
Shenoy disarmingly answers the neomercantilists’ big question: “You say, how are we going to compete with all these other countries? The answer is, of course, you compete by producing goods that were not produced before.”
And because the expanded division of labor, global trade, and competition lower prices, there’s capital left over for the production of goods we couldn’t afford yesterday.