Purpose of Trade

For some reason, international trade is incredibly misunderstood, even by many academics and policy "experts." At the recent G-20 conference in Pittsburgh, "leaders" from 20 economically influential nations discussed ways to plan and run the global economy. One topic that was dicussed was global trade "imbalances." The big focus was on China's net exports and the United States' trade "deficit." Policy experts at the conference noted how U.S. net exports have increased during this recession, and claimed that this was good. For some reason, many people think "exports good, imports bad." This could not be further from the truth; in fact, it is the opposite of reality. Imports, the goods we will consume are benefits and exports, what we send away, are costs. Costs are only necessary to pay for beneficial imports. The fact that we get get more goods from other countries than we send away does not imply that we are in debt, nor does it imply that there is a problem.
Here is an example: I am Mr. Sony from Japan. I sold Joe the Plumber--an American--a Play Station 3 for $300. This would increase America's current account deficit by $300. However, nobody is in debt, at all. Nothing is different than if Mr. Sony was from Oregon and Joe was from Kansas. Why do we not calculate inter-state trade deficits and surpluses? Because it is a silly metric. Borders are a red-herring and trade is trade no matter what borders it crosses.
A common caveat people put into this concept is the one of Chinese currency manipulation. First of all, Chinese currency inflation is bad economic policy, but not because it hurts Americans. It hurts the Chinese people. By inflating the Chinese currency to increase net exports, the Chinese government is lowering the Chinese people's purchasing power and subsidizing American's purchasing power. Americans should be thrilled, we are getting more goods with fewer costs, exports. The Chinese people are forced into making much more than they are able to purchase. This goes back to one of Adam Smith's most basic point about economics. "Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer." This is so intuitive, so why do people make the mistake of valuing exports over imports? In each household we seek to maximize wealth by importing more than we export. It is the same concept between states and between countries.

The most lucid mind that I have found on trade is Don Boudreaux over at Cafe Hayek. Cafe Hayek is a great economics blog,(my personal favorite) and I suggest that everyone check it out, though continue to read My Two Sense!!!

Smoot-Hawley 2009?

My thoughts on the new tariff:

Government policies always have unintended consequences; however, the consequences resulting from Obama’s new protectionist measure will be severe and predictable. I assume that in an effort to “jump-start” the American economy, President Barack Obama has decided to impose a 35% tariff on Chinese tires. Most economists, from almost all economic ideologies, agree that free trade helps maximize economic production and economic well-being. However, Obama’s new tariff will not just contribute to further economic turmoil, it will cause death and destruction. I know, I know, this sounds extreme. But it is a logical certainty that if this tariff is imposed, President Obama will have blood on his hands. I would argue that President Obama is committing the same mistakes that President Hoover committed.

By definition, a tariff imposed on an imported good is a tax on consumers of that good. Presumably, American consumers buy tires made in China because they are cheaper and/or of higher quality. By taxing tires, consumers will be forced to pay for more for tires meaning that they will be marginally less wealthy. This is true by definition. Less disposable income will lead to lower demand and diminished purchasing power in the economy. Even working within the traditional Keynesian framework this would have disastrous effects. Also, imposing this tariff could lead to a trade war that could affect the trade of many other goods. A decline in world trade is already hurting the economy, and further restrictions could be devastating. One only needs to look at Hoover’s Smoot-Hawley tariff to see the disastrous effects that protectionism can wreck on an economy that is already in recession. It is generally well accepted that Smoot Hawley accelerated the American economy’s slide into depression; this new tariff could lead to further tariffs that would have a worse effect because today’s world economy depends so much more on global trade than ever before.

There is no and can be no economic rationale behind this tariff. It is a payoff to industries and unions that supported Obama. It is an attempt to help a few industries at the expense of the American and the world economy. While the Obama campaign promised that his administration would not be swayed by special interests. This was a broken promise, as his administration has participated in the same type of special interest pandering as President Bush. There has been no change in Washington.

I am willing to claim that Obama will have blood on his hands if this tariff takes effect. By making tires more expensive, some consumers will inevitably put off their purchasing of new tires to a later date when they can afford it. It is logically certain, that, in turn, some marginal group of people will get into an accident due to overly worn tires. This may be a small group, but it will exist. However, the specific incidents will be impossible to identify, so Obama will be not be blamed. This is the law of unintended consequences. Most government policy attempts ignore this law.

I have mixed feelings about China’s retaliatory tariff. I hold the view that the freer the trade, the better. So in this sense, I should be totally and completely against China’s tariff, and this was my initial reaction. However, I think the issue is far more complex. Adam Smith, one of the initial thinkers who understood the benefits of the free market and free trade, also understood the retaliatory tariff as a means to freer trade and more open markets. If China’s retaliatory tariff convinces American policy makers to remove our economic sanctions on foreign goods, then I would consider the tariff to be a good thing. However, there is always the danger of allowing a series of retaliatory tariffs to lead into an international trade war with devastating consequences. We really are on the brink of an economic collapse. Bad economic policy can force the U.S. and the world economy into a severe and prolonged economic depression.