No Witz About Trade

by Don Boudreaux on June 17, 2016

in Balance of Payments, Myths and Fallacies, Trade

On my Facebook page Scot Wick quoted a passage from a new book by the modern-day mercantilist Clyde Prestowitz – who, being a mercantilist, understands neither trade in general nor matters concerning the trade deficit in particular.  (I do not believe that Scot agrees with Prestowitz.)  Here’s part of the Prestowitz passage quoted (from page 2 of Prestowitz’s book) by Scot Wick on Facebook:

It is easy [for the free traders, who Prestowitz opposes] to downplay the significance of the U.S.-China trade imbalance, as well as the startling difference in the nature of what we import [computer equipment] and what we export [scrap]….

The words in brackets are added by Scot Wick, but a quick Google Books check reveals that Prestowitz does indeed complain about the U.S. exporting scrap and importing computer equipment – although on Prestowitz’s account U.S. scrap is exported to Asian countries in addition to China, and computer equipment is imported from Asian countries in addition to China.  Here’s a quotation from pages 1-2 of Prestowitz’s book:

Even more striking than the size of the port and the armada of ships is the contrast between the cargo that’s off-loaded and that being loaded for the return trip to Osaka, Busan, Shanghai, Hong Kong, and Singapore.  The imports are as numerous as the sands on the nearby beach, including everything from shoes and shirts to computers, autos, advanced telecommunication gear, and photo voltaic panels for generating solar energy.  The exports, though, are few, consisting mostly of scrap metal and waste paper – this millennium’s dung, you might say.

In 2008, our scrap metal and waste exports to China alone totaled $7.6 billion, exceeding our exports of each of the next three strongest categories: semiconductors, aircraft and parts, and oilseeds and grains.  And even with all of those and other exports included, the U.S. trade deficit with China runs annually at about $250 billion….

A sure sign of failure to adequately understand trade in full is to worry that country X is necessarily harmed by running trade deficits with the rest of the world.  A sure sign of failure to understand anything at all, including the first principles, about trade is to worry about country X’s “trade imbalance” with country Y.  As pointed out often here at Cafe Hayek, even if – contrary to fact – a U.S. trade deficit with the rest of the world is economically harmful to Americans, a U.S. trade deficit with any one or more of a subset of the world’s other countries is not harmful.  Nothing at all in economic theory, or even in common sense, suggests that, in a world of more than two countries, the amount that country X imports from country Y will or should equal the amount that country X exports to country Y.

Quite frankly, the moment anyone – regardless of degree, pedigree, profession, position, or prize-holdings – starts talking about bilateral trade “imbalances” in a world of more than two countries, that person deserves no further attention.  He or she either doesn’t know what he or she is talking about or he or she is being intentionally deceptive.  There is no other alternative.  Having no cause to suppose that Mr. Prestowitz is anything but honest and sincere, I conclude that he is simply, and deeply, ignorant about trade.

No further evidence of Mr. Prestowitz’s ignorance about trade is required to establish that ignorance as a presumptive reality.  But other evidence of such ignorance is readily available.

Consider his allegation that it’s somehow bad to export scrap and get in return valuable goods.  Prestowitz writes as if non-Americans willingly accept worthless crap – “dung” – from Americans in exchange for valuable goods.  If only it were so!  I’d love for Sony or Toyota or Starbucks or Ikea to agree to give me some of the items they market in exchange for mere dung (or whatever other junk I might dig up from somewhere).

The fact that Prestowitz thinks that the party who gives up valuable goods in exchange for dung is ‘winning’ at trade while the party who receives valuable goods and pays for these goods with mere dung is ‘losing’ at trade tells you all you need to know about Prestowitz’s grasp of economics.

But, of course, the scrap and waste that the U.S. exports is not, contrary to Prestowitz’s obvious implication, valueless or (what is the same thing) cheap stuff widely available almost anywhere on earth for the taking.  We know that it’s not valueless because strangers abroad willingly send us valuable goods in exchange for this scrap and waste.

Prestowitz likely is confused by the fact that, because some products are the by-products of production processes that take place in America (for example, the scrap metal that I know from first-hand experience is generated when Americans build ships) – and because non-Americans have a comparative advantage at converting these by-products into valuable goods and services – that American exports of scrap are without much value.  But he’s mistaken.  (Remember the old joke about what weighs more: a pound of lead or a pound of feathers?  The lesson of that joke applies here.)


Clyde Prestowitz is a prolific mercantilist – which means that he’s a prolific source of confusion and misunderstanding about economics generally and about trade in particular.


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