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Fletcher Doesn’t Understand Trade
Posted By Don Boudreaux On February 28, 2011 @ 2:12 pm In Seen and Unseen,Trade | Comments Disabled
Here’s a letter to the Huffington Post:
Ian Fletcher claims that “Much of our recent export growth has been hollow anyway, consisting largely in raw materials and intermediate goods destined to be manufactured into articles imported back into the U.S…. But this is obviously a losing race, as the value of a product’s inputs can never exceed the value of a finished product sold at a profit” (“Trade Solutions That Won’t Work ,” Feb. 27).
This claim is an avalanche of errors. Here are only two.
First, Mr. Fletcher illegitimately assumes that every finished product produced in Mexico with inputs imported from America is sold in America. But if, say, only 60 percent of shirts produced in Mexico from U.S. cotton are sold in America – with the remaining 40 percent sold to non-Americans – the amount of dollars that Americans earn by selling cotton to Mexican shirt producers can easily exceed the amount of dollars that Americans spend buying shirts from Mexico.
Second and more fundamentally, if Americans can produce cotton at a lower cost than can Mexicans, and if Mexicans can transform that cotton into finished shirts at a lower cost than can Americans, then Americans and Mexicans both gain by the current arrangement. That we Americans might pay more dollars for finished shirts than we receive for cotton exported to Mexico is irrelevant. The reason is that a finished shirt is more valuable to American consumers than is the raw cotton that is in it: Americans pay for receiving something of more value to us (finished shirts) by giving up something of less value to us (raw cotton). How is such trade harmful?
Donald J. Boudreaux
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