The Economic Meaninglessness of Political Borders

by Don Boudreaux on February 23, 2007

in Balance of Payments, Trade

Sheldon Richman, of the Foundation for Economic Education, firmly grasps what Adam Smith meant when that Great Scot wrote in The Wealth of Nations the following wise words:

In the foregoing Part of this Chapter I have endeavoured to shew, even upon the principles of the commercial system, how unnecessary it is to lay extraordinary restraints upon the importation of goods from those countries with which the balance of trade is supposed to be disadvantageous.

Nothing, however, can be more absurd than this whole doctrine of the balance of trade, upon which, not only these restraints, but almost all the other regulations of commerce are founded. When two places trade with one another, this doctrine supposes that, if the balance be even, neither of them either loses or gains; but if it leans in any degree to one side, that one of them loses and the other gains in proportion to its declension from the exact equilibrium. Both suppositions are false [emphasis added].

In this essay, Richman wisely asks

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, then, there are no imports and
exports. There is only what I make and what everyone else makes. Few
people would want to live just on what they themselves could make. Frederic
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.

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  • Ah, but governmental entities do exist, and it does no good to argue that they shouldn't. We will never live in such a world. We may debate the appropriate structure, size and operation of governments, but we will not do away with them.


    And all governments require revenue streams in order to operate. Just as they view trade occurring within borders as a valid revenue source, they view trade that crosses their borders as a valid revenue source. At least some of the regulation that restricts completely free trade is wrapped up in governments attempting to defray the cost of services they provide.

  • The Economic Meaninglessness of Political Borders may be all well and good as a concept if you don't factor in the role of separate central banks for different geo-political areas.


    Once central banks are factored into the equation, things change.


    For example, the trade deficit the United States shows with China would not exist to the degree it does today if it wasn't for the fact that China's central bank is printing renminbi and buying dollars to support the trade deficit. The trade deficit in this situation does become important because one must ask the very important question, "Just how many renminbi is China's central bank willing to print before they cry 'uncle' and stop buying dollars, and thus change the cross border China-US trade situation dramatically?”

  • lowcountryjoe

    Raymond,


    Assume that the Chinese do stop buying dollar denominated assets (particularly debt). The dollar loses strength against the renminbi and interest rates rise in the United States. Look on the bright side. everyone that clamors for a balanced trade defict gets their wish and it also becomes much harder to fuel business expansion in the U.S. due to tightening credit, but hey, at least as we start to export more, we'll gain more manufactoring jobs, right? Riiight?

  • "We will never live in such a world."


    Never is a very long time.

  • Steven Johnson

    Mr. Don Boudreaux,


    You are absolutely correct; however, you are speaking from above the neck while living on planet of the apes. What is call government is just an arbitrary group of dominate persons that have the law in their mouth. And as one of the comments pointed out we will always have a “government” i.e. it will always be planet of the apes…


  • ben

    Reach Upward said:


    "Ah, but governmental entities do exist, and it does no good to argue that they shouldn't."


    An argument against government interference in cross-border trade is not the same as an argument against government. Far from it.

  • ben:


    I think Reach Upward's point is this: Governments profit off their country's trade surpluses. Other governments have interests that don't coincide with my welfare. Therefore, if anyone is going to run a trade deficit, I want it to be the other government's country.


    I could be wrong, of course.

  • The government's interest may very well be distinct from our personal interests, but the government must still appeal to our interests as to why deficits matter to justify their policy. Us lesser apes should be convinced that we have something to gain by having our freedom to transact with foreigners curtailed. Alas, the boys in Washington have never explained why I should care any more about a trade deficit with India than I would about a trade deficit with Indiana.

  • "We will never live in such a world."


    Is that a self-fulfilling belief?

  • Great idea.


    Now sell it to the Chinese.

  • M. Graham

    I believe what we are seeing now, expansive and intrusive government, is what the anti-federalists anticipated and feared. It is quite obvious that the sovereignty of the individual has been trampled on by the elected that swear to uphold the US Constitution.


    However, I do have a question. Without a national border, how is the rule of law enforced?

  • It won't be.


    Because we won't need it.


    When borders vanish guns will turn into butter, narcocorridistas will become wandering troubadors and we'll all live in a utopian world of free trade, prosperity, sunshine, lollipops and rainbows.

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