This graph from Mr. Graph himself – the indispensable Mark Perry – captures very concisely much of what Russ and I (and Mark, and Doug Irwin, and many other economists) have said in one venue or another over the years. Proponents of imposing heavier tax burdens on Americans who purchase goods and services from abroad should look at this graph and ponder the following questions:
1. Do you not worry about the possibility that fewer American imports will reduce American economic activity – and, hence, reduce American employment – even in the short-run? Because nearly six in every ten dollars that Americans spend on imports are spent buying inputs to production, why do you overlook the possibility that, with fewer or more costly inputs for use in production, some U.S.-based producers will either shut down completely or produce less?
2. Because so many American protectionists are (rather inconsistently) also champions of increasing American exports, do you not worry that, by employing protectionist policies that raise the cost to U.S.-based producers of producing, that higher tariffs will actually and directly reduce exports?
3. Do the data in Mark’s graph cause you to question the oft-heard argument that America’s trade deficit necessarily is a symptom of Americans “eating their seed corn” – that is, of Americans borrowing from foreigners simply to finance consumption today?
….
Here’s Mark’s take – relying heavily on Dan Ikenson’s recent superb WSJ essay – on the data.
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{ 27 comments }
There’s something wrong with that chart. $252 billion in oil imports on $2.5T of all imports should be around 10%. It should have its own category.
So you have nothing to refute Don’s logic with – you just want another oil category? Let’s score this one for libertarians, shall we?
another?
I mispoke. You want another category – oil imports. Now, point goes to libertarians.
SL,
I for one resent the fact that french fries are contained in the generic “Food” category.
Regards,
Ken
LOL!
Of course oil is a separate category. Oil is not the subject of protectionist attacks. If the chart does not show the imports that people would tax, what good is it? (Indeed, the chart merely shows WHICH imports protectionists should seek to tax. The flaw in DB’s logic is the assumption that protectionists wouldn’t think of taxing only SOME imports. That’s patent nonsense.)
http://www.cato-at-liberty.org/death-by-antidumping/
Magnesium. Protectionism. Tariffs. Loss of US jobs greater than those saved.
If we employ our own Navy to blockade our ports and sink our own ships, would be a policy that both protectionists, Krugman, & Keynes can endorse. It must certainly lead to prosperity.
Exactly! In one act it would help balance our trade deficit by limiting the value of imports, and the requirement to employ labor to replace the destroyed capital goods would foster a new economic utopia!
You are no chucklehead, Chucklehead.
Where are Muirgeo and IB? They should be endorsing this plan! Brilliant!!! (Um, don’t let Obama get wind of it – he may actually do it!)
Great Idea, and it would even get the backing of the war hawks who love to use United States power, only instead of forcing our boys to fight and die in a foreign country we could kill our own citizens right here in our own backyard! WIN-WIN
Yes, DG. We know. Please restrain yourself.
The trade deficit is entirely a creature of the Federal Reserve Bank.
Absent monetary inflation, the prices of goods from country to country would tend to equalize. Now, wages, say, in the U.S. would still be higher than in Viet Nam, but liberal amounts of capital here would keep the percentage of labor costs roughly equal.
With rising prices and wages due to inflation, though, our industries find it much more difficult to be competitive. Throw in a dose of overwrought regulation and the situation becomes quite hopeless. Consumers, naturally, buy where prices are lowest for similar quality and have more money to spend because of the inflation than they would otherwise.
It’s disgusting to hear them accused of profligacy and sloth when it’s government policies that have caused the trade imbalance. Now, I am not one who worries over the deficit in goods and services, but it is a symptom of bad monetary policy. It just needn’t exist at all.
Craig,
What you say seems to make sense, but do you have any sources that back up your claim that monetary inflation is the primary reason for trade imbalances?
My ignorance may be preventing me from seeing the obvious, is this so?
“Now, wages, say, in the U.S. would still be higher than in Viet Nam, but liberal amounts of capital here would keep the percentage of labor costs roughly equal.”
Facile, and seems to smack strongly of the word “if”; but please explain to this street guy what you mean by “liberal amounts of capital here” in the context you used those words. Who has the liberal amounts of capital, where does it come from, and why would it be inserted into the equation in your context, last if it isn’t being done now, why would it be under a system that denies monetary inflation? Is there an “if” in your statement?
BTW, I assume you’ve heard that “if frogs had wings they wouldn’t bump their little butts when they hopped”, “if” such a wondrous word.
Wages trend with productivity, and productivity trends with capital investment. The US is more capital intensive than Vietnam, currently.
I know you like to be the answer guy, and your succinct answer may be technically correct in doctrine; but, it still does not answer my several questions.
That does nothing to clarify your question.
Wouldn’t you expect, if anything, that by decreasing Americans’ purchasing power, the Fed would be decreasing the current accounts deficit?
I don’t know if I follow that, regulations and taxes yes, those certainly hurt the ability to compete. However, inflation, it seems to me would be only a minor factor since if your currency were devalued then you would be selling your goods at a discount.
Don,
I’m with you on points one and two, but for point 3, isn’t the financial deficit (not the trade deficit) a prime example of “borrowing from foreigners simply to finance consumption today?” Who is making the argument that this is related to the trade deficit versus the national debt?
North Korea, under the direction of Kim il Sung, sought to become totally self-sufficient. He wanted nothing to do with outsiders, and believed his nation would prosper as faithful North Koreans shunned all trade with the outside world. Things seemed fine, for a short while.
As the economy ground to a halt under extreme protectionism, the people suffered immense hardship. Famine killed millions in the 1990s and the hermit nation relied on humanitarian aid to feeds its starving citizens.
I don’t think erecting barriers to trade is the way to go.
Bastiat’s “The Balance of Trade” also destroys the myth that exports are better than imports.
Trade deficits are a sort of voodoo that politicians can use to scare people, and that industries use to call for relief from competition.
But if you understand that productivity, trade, and competitive advantage all lead to increases in wealth, and that high taxes, tariffs, and trade restraints all lead to a decrease in wealth, then all of that goes away.
More wealth makes everyone better off, even those who are poor, even those who might be displaced by better competition are better off after they readjust because more wealth means more wealth in circulation, means more jobs, means more and better everything.
Lowering wealth, or even lowering the rate of wealth growth leads to the kind of situation we face now, a recession, and everyone is worse off.