Costs are Not Benefits

by Don Boudreaux on July 12, 2011

in Myths and Fallacies, Seen and Unseen, Trade

Here’s a letter to the New York Times:

New York Farm Bureau president Dean Norton rightly seeks approval of free-trade pacts with countries such as South Korea (Letters, July 12).  But he wrongly justifies freer trade by emphasizing that “Without approval, the United States could lose nearly $2.3 billion a year in additional agriculture exports.”

Protectionism does reduce U.S. exports.  The resulting loss to Americans, though, isn’t the valuable goods and services that Americans don’t ship to foreigners; instead, it’s the valuable goods and services that foreigners don’t ship to Americans.

Consider the U.S. exports that Mr. Norton mentions.  Directly or indirectly, South Koreans purchase these exports with South Korean won.  Of what use are won to Americans except as currency for purchasing goods and services from South Korea?  If South Koreans refuse to pay for exports received from America – or insist on paying for these exports only with Monopoly money – no one would regard Americans’ failure to export to South Korea as a loss to America.

Americans’ losses from protectionist policies are measured exclusively in the value of the imports that those policies prevent us from receiving.

Sincerely,
Donald J. Boudreaux

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{ 47 comments }

Daniel Kuehn July 12, 2011 at 8:27 am

For some reason you always have this strong import bias. I don’t know why.

I think the better way to look at it is that every international trade is in some ways an important in some ways an export.

Our exports can be thought of as importing money. We import money from our trade partners and we import goods. We import money by exporting goods, of course. We import goods by exporting money. Goods exports are great precisely because they are money imports, and money allows us to invest, store value, exchange, etc. Importing money is not a bad thing just like importing goods is not a bad thing.

If it were a cost and not a benefit, we wouldn’t do it.

Daniel Kuehn July 12, 2011 at 8:28 am

*in some ways an IMPORT and in some ways an export

Don Boudreaux July 12, 2011 at 8:46 am

Just because incurring the cost permits us to enjoy the benefit does not mean that the cost IS the benefit.

In an ideal world, from Americans’ perspective, foreigners would ship us plenty of goods and services for free – refusing to accept any imports in exchange. Unfortunately for us, foreigners demand to be paid for what they supply to us.

As for your last sentence, it misses the point. We export not because the exporting itself is a benefit. The benefit of incurring the cost of exporting is found ONLY in the imports it makes possible – importing either in the current period or in future periods as a result of cashing out in future periods foreign assets purchased in the current period.

Daniel Kuehn July 12, 2011 at 8:55 am

OK, I see how you’re phrasing this now, but you can understand why this is a very strange way of putting it. It’s odd to, for example, decry retail transactions because those damned store owners won’t just give me what I want! Of course the benefit is in the goods I get and not the money I give (just as, with my employer, the benefit is in the money I get and not the labor I give). But I find the retail and labor transaction to be a net benefit to me, so of course I am pro-retail and labor transactions. Exporters find export transactions to be of benefit to them, so of course they are looking forward to the opportunity of exporting as a result of more liberalized trade. It seems like a bizarre thing to take them to task for.

re: “We export not because the exporting itself is a benefit. The benefit of incurring the cost of exporting is found ONLY in the imports it makes possible”

Well I’d disagree with this. Exporting is valuable and beneficial for everything that the imported money can do – investing here, storing value here, etc. Not necessarily buying imported goods.

Don Boudreaux July 12, 2011 at 9:16 am

In a world with national currencies (which is the world we live in today), if Americans export $1 billion worth of goods to foreigners, Americans are paid for these goods – either directly or indirectly – with foreign currencies. $1 billion worth of, say, Japanese yen MUST get back to Japan somehow, as yen are not spendable (or investable) in the U.S. directly. They must first be converted to U.S. dollars.

It might well be – indeed, it usually is – the case that the person who does the exporting is not the same person who does the importing. But if, say, Jones of Jacksonville is the exporter who is paid 100 billion Japanese yen, and Jones has no wish to import anything from Japan, what does he do? Those yen are valuable to Jones only because he knows that he can exchange them for other currencies spendable or investable in places that he does want to spend or invest – say, the United States.

Let’s say Jones wants to expand his factory in Jacksonville. He’s got 100 billion yen. He needs the dollar equivalent (say $1 billion). How does he get it? He offers to exchange. Only because there is someone holding U.S. dollars who wants to buy something from Japan (or to invest in Japan) will Jones be able to exchange his yen for dollars.

In reality, Jones likely goes to a bank to do the exchange. But the only reason the bank willingly parts with $1 billion in exchange for 100 billion yen is because the bank itself either wishes to spend 100 billion yen in Japan or, more likely, that it has current or future customers who are willing to pay to buy these 100 billion yen from the bank. If the bank wants to buy nothing from Japan and also believed that no one else will eventually come to it to offer currency that that bank does want to spend in exchange for the yen, the bank will refuse to sell Jones $1 billion for Jones’s 100 billion yen.

Trapper_John July 12, 2011 at 11:20 am

Exceptional clarity–this should be expanded into a textbook chapter.

One comment: if a Japanese exporter takes his US$ and puts them in the stock market, those dollars do not pass through to the “active” US economy (building things, buying services, etc.). Stock is simply a right to future profits of a company, and, unless new shares are issued, is typically purchased in a secondary market (thus the company does not get any of the “investment” made in its stock–much like GM doesn’t get any money from sales of used GM cars). Thus, even though imports from Japan result in additional investment in our economy, depending on how that money is invested, it may not be transformed into the goods and services that drive US employment. I guess the point is that eventually, if we don’t export anything, we’ll run out of money to buy stuff (import or domestic). Am I missing something?

SMV July 12, 2011 at 1:44 pm

Don- I think your general argument has to be true in a world with a single currency or direct barter as well. Otherwise trade within the US would potentially drain Wisconsin dry when trading with the other states.

Did you cover this in a past post?

SMV July 12, 2011 at 1:46 pm

Sorry did not read far enough down before posting. Smv

Don Boudreaux July 12, 2011 at 9:22 am

As for your point about Americans holding foreign currencies as investment units in and of themselves, you are correct. But that would then be the valuable import: Americans would exchange valuable American-made exports for valuable foreign assets – assets that are intended eventually to be redeemed into cash for purposes of buying consumable goods and services from foreigners.

Daniel Kuehn July 12, 2011 at 9:27 am

re: “But that would then be the valuable import”

1. Isn’t that exactly what I said in my first post?
2. Out of curiosity – because I’m not the trade economist – how much international trade goes on in U.S. dollars?

Don Boudreaux July 12, 2011 at 9:35 am

Most trade today takes place in U.S. dollars. But foreigners must first sell things to Americans in order to get the dollars that they then use to buy things from Americans.

Daniel Kuehn July 12, 2011 at 9:25 am

Another way of putting it is this -
What do you think this guy was extolling?

Do you think he was saying “wow – I’m really excited at the opportunity to give stuff to the South Koreans”, or was he saying “wow – I’m really excited at the opportunity to get stuff from the South Koreans, minus the costs I incur in providing them with what they want out of the transaction, of course”.

I think it’s safe to say it’s the latter, and if it’s the latter what’s the problem here?

Don Boudreaux July 12, 2011 at 9:33 am

The public understanding of international trade is abysmal. It is abysmal in large part because exports are today in popular parlance – as they were (and are) in the parlance of the mercantilists – spoken of routinely as the benefit domestic citizens enjoy from freer trade while imports are the cost.

I believe it to be important, in whatever modest ways that I can, to warn people against confusing costs with benefits. Exporting is a ‘benefit’ only in so far as it is a means to the ultimate benefit: imports. People – especially because of the hold that naive Keynesianism has on people’s minds – more often than not mistake work and production and the receipt of money as the ultimate goals of economic activity. But they are not; consumption is the ultimate justification of economic activity. Consumption is the end; production, work, and money (and financial assets) are the means.

Gary July 12, 2011 at 10:29 am

We can assume that Don has taken the ‘Made in America’ Pledge” by ABC News. Imports are bad. Trade is “battle.” Import addiction.

http://abcnews.go.com/WN/MadeInAmerica/mailform?id=12912252

Dan J July 12, 2011 at 4:19 pm

So we send them paper (money), that is the value of our labor, and they send us their hard assets (goods)?
As we just print more to take place of paper that was transferred…….

vikingvista July 12, 2011 at 1:57 pm

“For some reason you always have this strong import bias.”

It isn’t an import bias per se, but rather a consumption bias that all of humanity shares.

ArrowSmith July 12, 2011 at 2:10 pm

Import bias? Not really. Now with Apple, people can buy American with pride again. Although every single Apple products is assembled in China, the profits are American.

Kendall July 12, 2011 at 8:37 am

For someone who wants to encourage free trade, downplaying the benefit a farmer receives from selling his/her crop overseas doesn’t make sense to me. I assume the farmer receives payment in dollars and doesn’t have to worry about currency issues so it seems to me you are just complicating the issue for people who already support freer trade.

vikingvista July 12, 2011 at 3:36 pm

“worry about currency issues so it seems to me you are just complicating the issue”

Instead he is revealing the errors in thinking that the complication of currencies issues causes some people to make.

You can’t necessarily know anything of a general individual’s purpose for the goods he acquires in trade, UNLESS that good is money. Then you for sure know one thing–he intends to use it to acquire something else. All these accountings of money flows (current accounts, capital accounts) are incomplete assessments of the purpose and effects of trade. An accounting of an individual’s acquisition of money is incomplete until you see how he disposes of it.

So in that sense, it isn’t just talk of different currencies that unnecessarily complicates the issue, but talk of money at all. Consideration of ownership of non-money resources subsumes any consideration of money. Then, once money is removed from the discussion, you can talk about the more complicated issue of how those resources are used to achieve the ultimate goal of consumption (e.g. capital vs immediate consumption).

Kendall July 12, 2011 at 10:19 pm

The farmer selling his product is going to have his eyes glaze over reading your explaination (I’m not saying it is bad, I see the look in my math classes often). All he knows is he can now sell 1000 bushels to a new country and make more money in dollars.

vikingvista July 12, 2011 at 11:51 pm

If the farmer doesn’t want to understand economics, then all he needs to know are the prices he sees. But if he presumes to make political choices based upon economics, then there is no substitute for intellectual effort. Sorry, but that’s life.

Kendall July 13, 2011 at 8:53 am

It is also life that no voter has time to become an expert in all fields so if the experts want to have the best policy enacted they need to be able to find a way to present it simply and accurately.

vikingvista July 13, 2011 at 11:48 am

I’m not saying that a farmer who takes an interest in economics and politics has to become an expert in 17th century Romanian poetry. I’m saying that he has to make an effort to grasp what he is advocating. And conceptually it isn’t out of reach. Perhaps the most difficult part is believing your own powers of reason in the face of the sophistry that hammers you from all directions all of your life.

Kendall July 12, 2011 at 8:40 am

“Indeed. If Beijing truly is pursuing such a policy, that government is beyond doubt unfairly enriching some people at the expense of others. And the people unfairly enriched do include a few Chinese exporters. ” How does this statement fit with the idea trade benefits should exclusively be measured in terms of imports?

Don Boudreaux July 12, 2011 at 8:48 am

Benefits to the home country.

A subsidized business (be it an exporter or not) benefits, but at the expense of the larger economy.

anthonyl July 12, 2011 at 10:19 am

Protectectionism can only result in less stuff for everyone! If more stuff is the goal, protctionism should never happen. The benefits of trade are so great that people are willing to trade even with subsidies and tariffs in place. The thieves take their share but add nothing of benefit to the transaction.

Robert July 12, 2011 at 10:26 am

First, I have really enjoy this conversation.

Second, as i understand Boudreaux argument is importing the benefit of exporting then why do we often have trade deficits (X>M)? Is there some benefit in holding the currency?

Don Boudreaux July 12, 2011 at 11:00 am

America currently has a ‘trade deficit’ for a variety of reasons, most of which are benign or downright beneficial – namely, foreigners still wish to invest heavily in dollar-denominated assets.

But consider an example that, precisely because it’s extreme, throws clearly into relief the widespread mistaken understanding of trade.

America exports a total of only $1 worth of breath mints. Foreigners in contrast – perhaps being utterly duped by mercantilist authors – load ships and planes bound for America with $1 trillion worth of goods. These foreigners take the $1 trillion in cash received as payment from Americans and then immediately burn all of it and dump the ashes into the sea.

America will, as a result, find its trade deficit rise by $999,999,999,999.00.

And, sadly, the overwhelming reaction to this happy state of affairs would be pols, pundits, and even many economics professors lamenting America’s poor fate and demanding that Uncle Sam “do something” to protect us from any further such insults to our national pride and ‘subtractions’ from our national wealth.
….
Daniel Kuehn will respond to this comment of mine by criticizing my use of a mental experiment that might legitimately be called a reductio ad absurdum. Fine. Change the numbers so that the U.S. trade deficit is, say, a mere (and quite realistic) $600 billion.

The result would be exactly the same as in my more extreme example (save that Americans’ enrichment from stupid foreign mercantilist polices would be less than in my example).

Dan J July 12, 2011 at 4:37 pm

So in the US dollar trade for foreign oil, we are the economic wiener’s?

Long term?

We use up their resources in return for paper?
But that paper allows for buying up another’s resources.
And, short term, those who wish us ill will have the paper for purchasing items to cast ill will. And, when they cause us, in turn to relocate capital and resources toward thwarting the ill will or rebuilding damaged assets, what then?

There is a lot there. But, who wins?

Don’t assume protectionism…….. I advocate more trade, with fewest restrictions possible.
But, wouldn’t the US be benefitted by more oil production from within then importing vast quantities?
It would seem as if importing of the oil would be more beneficial then domestic production, from your argument?

vikingvista July 12, 2011 at 4:58 pm

“we are the economic wiener’s?”

Speak for yourself, dude.

Dan J July 12, 2011 at 5:07 pm

Didn’t get a laugh out of ya?

Don Lloyd July 12, 2011 at 11:03 am

There is no question that exports are necessary costs, and NOT benefits.

Consider Boeing exporting a airliner to China :

What is the effect on the American economy of the miles of copper wire stuffed inside? Obviously everything made with copper must cost more as the available supply of copper is stretched.

What is the effect of all the American labor used in assembling the airliner? The same as the copper, the dollar price of US labor to the American economy increases because of the relative increase of demand vs supply.

Surely the benefit of all the GOOD, high-priced, US export jobs is a benefit? Not hardly, except for your neighbor who actually holds the job. He is now employed making something that provides you with nothing to eat or wear or otherwise consume to the advantage of your standard of living. Instead his high paycheck means that the local supermarket can and will set higher prices and offer smaller discounts than it otherwise would, all to your disadvantage.

What about the money that China pays for the airliner, that must be a benefit, right? It’s a benefit for Boeing, if it charged enough, but otherwise it depends primarily on the quantity of Chinese consumption imports to the US thus enabled.

What if Boeing insists on being paid in US dollars? Does this leave Americans better off? No more so than when the FED or an honest counterfeiter creates more dollars. In all three cases the purchasing power of every dollar you own is reduced.

Regards, Don

Kendall July 12, 2011 at 10:29 pm

The copper is either provided by American workers who now have more money because they have more jobs so they buy more at Wal-Mart who hires an extra shift, etc or the copper is imported. Either way the country benefits. The extra income for the supermarket means it can now expand and hire more workers and import more food, both good things. Not to mention the extra money Boeing stockholders received due to the sale, which they either put in the local economy or imported goods. I think this whole idea of exports bad, imports good is counter productive to the goal of increasing free trade.

Don Lloyd July 13, 2011 at 1:10 am

Kendall,

Your reply is complete economic nonsense, when all effects are looked at over their entire range. The issue is not export/bad, import/good, but the reason that exports CAN be good is the fact that they can enable additional consumption from both foreign and domestic sources.

Regards, Don

Kendall July 13, 2011 at 8:59 am

When you say “There is no question that exports are necessary costs, and NOT benefits” I think the average person would interpret you position to be exports are a necessary evil which many people would equate to being bad. In general we want to reduce costs so it sounds like a reduction in exports would be desirable. By the way, what specifically in my previous comment is incorrect?

Kendall July 13, 2011 at 9:40 am

How would your argument apply to South Caroline vs. Washington with Boeing opening a new plant in SC instead of WA? Would SC as a whole be better off not having local supermarkets raise their prices due to the new high paying jobs? Does the common currency change everything?

Don Lloyd July 14, 2011 at 12:53 am

“… Would SC as a whole be better off …”
This is the kind of question that cannot be answered even in theory. All changes produce both winners and losers. There is no legitimate fundamental way to say that the winners are more important than the losers or vice versa. There will certainly be many losers in SC, likely including many who have their homes bulldozed out from under them as a tidal wave of new workers appears. But worse would be the precedent of a politicized Labor Department in the pocket of organized labor being able to control siting decisions on the part of private businesses. (Not that Boeing is any real kind of a free market organization) Regards, Don

bb July 12, 2011 at 11:26 am

The case is often made in Mr Boudreaux’s arguments for free trade that US Dollars can only be used to purchase US goods (or US investment oppotunities). Accordingly, it’s a bit silly to fret about our trade ‘deficit’ – Afterall, whatever dollars we spend on foreign imports are certainly going to come back to us, either to buy our exports, or as investments. Seems like very logical, straightforward thinking. As a thought experiment, what would become of this argument if, say, the world adopted a common currency? There’d no longer be any reason to beleive that our foreign expenditures boomerang right back to us. Just for the record, I’m not claiming to have exposed a logical flaw in this line of reasoning. Not in the least. Just aiming to enhance my understanding of the topic.

The Other Tim July 12, 2011 at 11:33 am

The various US states have a common currency. Is there a “trade deficit” problem between US states? (Yes, I’m shamelessly stealing this from Mark Perry)

Don Boudreaux July 12, 2011 at 11:36 am

Very good question. The situation would indeed be different. A world with a common currency would be identical in this regard to, say, the United States. In such a world, demands shifting from producers in Armenia to producers in Albania would be very much like what happens today when demands shift from producers in Alabama to producers in Alaska. Prices of productive resources in Armenia (and Alabama) would fall, as would the prices of consumer goods there, thus increasing the profitability to entrepreneurs of redeploying those resources in ways that are profitable (that is, in ways that again attract sufficient consumer demand) AND increasing non-Armenians’ (and non-Alabamians’) demand to buy the exports of Armenia (and Alabama).

Ken July 12, 2011 at 3:16 pm

Don,

Along this line, has there been any study to see what states are operating a trade deficit with other US states and which are running trade surpluses?

Regards,
Ken

vikingvista July 12, 2011 at 3:49 pm

One could think of a money economy as a more efficient barter economy. Once money is collapsed out of consideration, by not considering a dollar acquired until after it is spent, what meaning does “trade deficit” have? Ultimately we see that all trades are in deficit (and in surplus) from each trader’s perspective, since nobody trades away precisely the things they intend to acquire.

“Trade deficit” only has meaning with respect to a chosen reference good. What useful purpose is there in choosing dollars for that reference good?

Ken July 12, 2011 at 5:19 pm

The reason I was asking is because I think the idea of a trade deficit is stupid. I’m pretty sure if the same criterion was applied to the states within the US that many protectionists apply between countries, their criticisms would crumble. Since people don’t seem to give a damn about non-Americans, let’s make the same criticism between Americans. Let’s see if someone will really suggest that Californians need to be protected from Wyomingans.

Regards,
Ken

vikingvista July 12, 2011 at 5:40 pm

“the idea of a trade deficit is stupid.”

A more succinct version of what I said.

Don Lloyd July 12, 2011 at 1:48 pm

If dollars are lost or destroyed or exported to Mars, the only people worse off are the actual previous owners of those dollars, every other holder of dollars benefits.

Regards, Don

Don Lloyd July 12, 2011 at 1:56 pm

A common currency means little by itself without knowing the money supply per capita distribution among the regions in question, at least until it shifts towards equalization. This is why applying a common Federal legal minimum wage to the US northern Pacific islands is such a Congressional crime.

Regards, Don

Harvey July 14, 2011 at 12:42 pm

You say, “The resulting loss to Americans, though, . . . [is] the valuable goods and services that foreigners don’t ship to Americans.” Isn’t the loss to Americans the amount by which the cost of such goods and services would be higher if they were bought from a US source, i.e., not the value of the service but the value of the discount?

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