Important Perspective on Imports

by Don Boudreaux on November 29, 2011

in Trade

Note these data presented by Carpe Diem’s Mark Perry:

And note also this part of Mark’s accompanying commentary:

The chart above displays U.S. imports by category for 2011 (through September) and shows that roughly 58% of imported goods are: a) industrial supplies and b) capital equipment that are being purchased by U.S. producers.  If we were to completely eliminate tariffs on imports, U.S. manufacturers relying on foreign inputs would receive significant benefits, while other U.S. manufacturers competing against imports would be less protected from foreign competition.

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Nikolai Luzhin, Eastern Promises November 30, 2011 at 4:08 am

Having just read a Christina Romer on the need for economist to consider all variables, I find myself compelled to correct, again the lies that Russ and Don put out about trade and imports. The theory is fundamentally wrong because it disregards location theory and variables.

The best writer today on location theory is Martin Jacomb who just wrote in the Financial Times:

In any single currency area resources are always magnetised to the economically successful regions. To counterbalance this, political action is needed. Central government collects taxes from successful endeavours and redistributes resources to poorer areas. This is not done just by regional aid, but by welfare transfer payments and paying the wages of public sector employees or building infrastructure. Were it not for this process, market forces would always tend to make rich regions richer and poor areas relatively poorer.

http://www.ft.com/intl/cms/s/0/83cca7c8-110f-11e1-ad22-00144feabdc0.html#axzz1fB2L3OrL

I selected this passage because of his wonderful word: magnetised. What a metaphor.

Now, when we trade with China (or when we do anything else that promotes growth there) we increase the magnetization of China. Pretty soon, China is going to be the 800 lb. guerrilla of magnets in the world economy, pulling the location of all economic activity to it.

To fight such there is only one solution—currency wars. Jacomb has written several times about how this activity has worked quickly to kill off economic activity in the EU, where the South cannot lower prices to maintain itself. You cannot have a currency war in the US between SC and ND, so we have other races to the bottom, like underfunding education and health care for children so that we can charge lower taxes to get industries to move from other states. But, that is an aside.

So, Russ and Don

How about an honest post on trade just once. Offset all your trade is good BS by applying the force of magnetization, which means over time that all benefits flow to the exporter.

Invisible Backhand November 30, 2011 at 10:00 am

Russ only makes challenges then runs away. Don may answer once, but you never get a follow up. Ask Dan Kuehn about that one.

BTW, that was a subscriber only link. Here’s the non subscriber one:

http://www.ft.com/intl/cms/s/0/83cca7c8-110f-11e1-ad22-00144feabdc0.html#axzz1fCWLZ5jG

The Other Eric November 30, 2011 at 11:34 am

It’s not that simple, and as good as the metaphor is, it’s applied to a multivariate system. You then tip your hand with “To counterbalance this, political action is needed.”

No it is not needed. It is political action, simplistically applied without accounting for downstream effects, that always creates favorites and supports niche players to capture the regulators.

Don’t accuse anyone of being dishonest here you arrogantly ignorant troll.

Jim from Kansas November 30, 2011 at 5:31 am

Alright, now it’s my turn to “Call BS”. If “all benefits flow to the exporter” why would an importer ever voluntarily enter into a trade with him? What coercion would an international exporter have on me that could force me into such an unbalanced transaction? Can you describe a single time in history when any of this has ever actually occurred?

Nikolai Luzhin, Eastern Promises November 30, 2011 at 5:52 am

It is happening right now in the good ole US

look at all the firms moving to China, Hong Kong, etc.

just ask yourself: Where do most people go to shop? Answer, at the largest retail mall. But don’t take my word for it.

Start out with the basics like “Reilly’s law of retail gravitation states that larger cities will have larger spheres of influence than smaller ones, meaning people travel farther to reach a larger city. The law presumes the geography of the area is flat without any rivers, roads or mountains to alter a consumer’s decision of where to travel to buy goods. It also assumes consumers are indifferent between the actual cities.
The law was developed by William J. Reilly in 1931.
Ba / Bb = (Pa / Pb) * (Db / Da)square
A plain English paraphrase would be that the balance or Break Point (BP) is equal to the Distance (d) between two places, divided by the following: Unity or Total (1) plus the Square Root of, the size of Place One (p1) divided by the size of Place Two (p2).
d is distance and p1 and p2 are the sizes of the places between which the distance exists; the answer will give the distance from p2, also called a break-point. What is the break-point? As an example: after leaving a store a you remember something that you wanted to buy; it just so happens that you are headed towards an alternative store b. The break-point can be thought of as the point after which you would travel towards store b instead of store a because of its notional “gravity”. This would happen sooner, for example, if store b is an equivalent store but with greater square footage, suggesting that you are more likely to go to store b for greater available utility. This notional gravity can be influenced by a number of things, but square footage is simple and effective.”

The best example of economic magnetism is Sun Records in Memphis that started in 1952. Look at all the artists who traveled there in four years from little towns in the mid South, Porter Wagoner from Missouri, Dolly Parton from Tenn., Elivis from Mississippi, Jerry Lee Lewis from La. Ed Bruce and others from Arkansas. This is straight location theory. People with talent and ambition move to cities with bright lights and have since the start of time.

Now, you show me where these theories on trade take this into account and I will listen but they don’t. They assume that people stay put and trade. They don’t. They move. You make China stronger and economic activity will move there.

Just ask yourself, if you want to sell stock’s, do you locate in Detroit or Shanghai, all other factors being equal?

Roubini’s favorite song is Jay-Z’s Empire State of Mind. Why?

http://www.youtube.com/watch?v=0UjsXo9l6I8

Cities are what matter and imports are killing our cities.

The Other Eric November 30, 2011 at 11:42 am

You can’t name five firms “moving to China.” Firms open plants, create trading relationships, and get local financing for different activities all the time. Firms are not their operations. Physical operations do not rely on locations. Cities matter, but for none of the reasons you suggest.

Firms are not moving from the US to China in anything more than a trivial number. You simply do not, and apparently cannot honestly, think through the complexity of producing goods and services.

samhouse December 2, 2011 at 7:35 am

When firms outsource their entire production to China, they therefore “move” their jobs to China. Other Eric, I guess you won’t be satisfied that a company has “moved” to China until they close their mailbox in Bermuda.

vidyohs November 30, 2011 at 6:10 am

The comments to Perry’s article are as interesting as the article.

anthonyl November 30, 2011 at 6:52 am

Unhampered trade is always the best for the most people.

anthonyl November 30, 2011 at 6:57 am

By imposing restrictions governments harm people by limiting the free flow of goods, services and people to areas of their highest valued use.

muirgeo November 30, 2011 at 6:58 am

As I understand some 40% of those imports are products manufactured overseas by American companies. How about we get rid of all tariffs on our exports and eliminate the tax advantages of off-shoring? That you consistently ignore these factors reveals the impure nature of your position. I’m not sure what it is you want but it seems inconsistent with the position a libertarian would hold. Is being a libertarian about getting the lowest price no matter what or are there some other more fundamental principles that supersede even price?

gregworrel November 30, 2011 at 10:09 am

muirgeo, if you mean get rid of the corporate income tax which acts as a type of export tariff, then I agree.

To answer your second question, being a libertarian means letting individuals decide for themselves with whom to trade without inhibiting taxes or quotas.

The Other Eric November 30, 2011 at 11:45 am

No principles are fundamental. The archest of libertarians will still select a pricey wine if they like the taste. Libertarians, seemingly, are about personal choice, not a grumbling gaggle of scribbling accountants.

Jon Murphy November 30, 2011 at 11:53 am

Forget about it Eric. You cannot argue personal value with these guys. All they care about are dollars and cents.

The Other Eric November 30, 2011 at 12:51 pm

That’s why I get so confused by the central planners and the socialists. All I care about are my taste buds.

Call me a gustolibertarian.

anthonyl November 30, 2011 at 7:10 am

Thank You Chinese Communist Government!  Your policies have made me better off.  How ironic!  
And to boot, my own government is asking the Chinese to fix it so I’m worse off as an American consumer?  Geez US government!  Your supposed to be protecting my interests as you claim, not getting the CCG to do the right thing by its own people.  Governments are weird that way, they know not what they do.

anthonyl November 30, 2011 at 7:21 am

Even if trade restrictions caused increased wealth (they don’t) they still impose a burden on the free flow of goods, services, people and ideas across the face of the earth and are therefore coercive. Eliminating these restrictions creates the most wealth for the most people.

Nikolai Luzhin, Eastern Promises November 30, 2011 at 10:53 am

anthonyl

there is no evidence that free flow does more than concentrate wealth.

there is overwhelming evidence that cross fertilization in cities creates wealth

The Other Eric November 30, 2011 at 11:51 am

Nik, you boring troll. Without benefit of critical thinking you can make wildly stupid statements and bask in your own glow.

Please provide any evidence that free trade “concentrates” wealth (whatever the hell that means). Crony capitalism concentrates economic power and corrupts regulators. Central planning concentrates economic power and limits opportunities to elites. There’s plenty of evidence for those two ideas.

How, in your tiny little blinkered mind, can free trade “concentrate wealth” when innovation and competition are allowed to constantly challenge established firms?

anthonyl November 30, 2011 at 7:24 am

Libertarians value freedom and liberty above low price. At least the ones that don’t shop at Wall-Mart do.

Robert November 30, 2011 at 9:48 am

Luzhin, you say that “economists to consider all variables” but you ignore variables in your own argument. You assume one exporter, China and the market is fixed. There are many exporters and importers which are mostly decided by individuals. They all face competition in the global market when one tries to rise prices to a monopoly another company in another country will enter the global market. The tariffs only prevent competition and inefficiently distribute wealth to the importing market.

Nikolai Luzhin, Eastern Promises November 30, 2011 at 10:51 am

Robert, your last sentence proves my point. You write, that tariffs permit the importing country to retain wealth. Retaining wealth means you retain your magnetic attraction

Beyond that your premise of “dispersion” is a false one. People and economic development congregate in cities, some of which work and some don’t. Read the new book The Coming Job Wars on what makes cities work and their importance.

In sum, trade doesn’t work in the long run.

Robert November 30, 2011 at 12:48 pm

If trade does not work in the long run then the world’s economy would localized in one geographical area. The united states real GDP has increases considerably since WWII while its share has decreased. During this period there has been more trade not less.

vidyohs November 30, 2011 at 5:29 pm

“In sum, trade doesn’t work in the long run.”

You’ve written some really stupid things on this blog, but that is the classic, untoppable, stupidity of all time.

Somewhere in your looney left imagination there is a man with a gun who forces people to swap things of value, and that man must have a hereditary position because trade has been going on since before the Neanderthals.

morganovich November 30, 2011 at 9:59 am

where is oil in this set of categories?

industrial supplies?

Jon Murphy November 30, 2011 at 10:14 am

I believe so. Unless you’re talking refined oil-products like gasoline, which I believe is in consumer goods.

Jon Murphy November 30, 2011 at 10:35 am

Actually, both are industrial supplies, as they are “Chemicals and Allied Products”

Jon Murphy November 30, 2011 at 10:35 am

According to the Census.gov site

dave smith November 30, 2011 at 10:57 am

I thought the pupose of this post was simply to illustrate that people in the US import more than just finished goods.

And it looks like the puprose of the comments section is to illustrate that some people should get their own blog.

Jon Murphy November 30, 2011 at 11:50 am

Another thing to keep in mind with trade is that it is not simply the movement of goods and services. Trade also exchanges ideas.

How much better has the world become with globalization? We have learned so much (and are still learning) about the Chinese culture since the barriers fell. Think about how much we know of South Korean culture but so little of North? How much have we learned about and from the Russians since the fall of the Berlin Wall?

As goods cross boarders, so do languages, cultures, stories, ideas, philosophy, religions, folk lore, etc! Why deny that to ourselves? If America withdrew into ourselves and never traded after the Revolution, would we have known of the works of Keynes? I think not.

Barriers to trade do more than keep out goods and services. The keep out cultures. It almost amounts to xenophobic nationalism.

Jon Murphy November 30, 2011 at 12:01 pm

For the record, I am not saying protectionists are also xenophobic nationalists. I am just saying their actions are similar to the actions of XN’s.

Greg Webb November 30, 2011 at 11:52 am

“Barriers to trade do more than keep out goods and services. The keep out cultures. It almost amounts to xenophobic nationalism.”

Exactly!

Jon Murphy November 30, 2011 at 3:59 pm

Another thought on trade:

Why are trade embargos used was a weapon? I understand the political reasoning (you don’t want your enemy to have resources). But from an economic standpoint, does it really make sense? I mean, is not our embargo with Cuba hurting us as well as them? Think of all the luxuries we are denying ourselves because of this embargo: Cuban cigars, Cuban rum, sugar, bananas, tourism! What is the benefit to Americans with this action?

I began thinking about this as I was reading an article about the UE debating on halting importing oil from Iran. It seems to me, this would hurt Europeans more than Iranians. Europeans would face a lower supply of oil, thus raising the price in a time when the continent is struggling. Although I understand the political logic, I don’t see the economic logic. I feel there would be a better way of delivering the message to Iran without hurting Europe.

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