Physicalism Is Fallacious

by Don Boudreaux on February 24, 2017

in Balance of Payments, Myths and Fallacies, Trade

Here’s a letter to the Washington Post:

Charles Lane deserves applause.  Not only does he expose the radical-left-wing origins of the Trump administration’s proposal to change the way that goods transshipped through the U.S. are accounted for in trade statistics, Mr. Lane also reveals the utter meaninglessness of bilateral trade ‘imbalances’ – such as America’s trade ‘deficit’ with Mexico (“Trump’s attempt to massage economic data isn’t new. But there’s a better way.” February 24th).

But I fear that a third valid point made by Mr. Lane will go unnoticed – namely, that the Trump administration is mistaken to insist that no value is added in the U.S. to goods transshipped through the U.S. to other countries.  We can see the administration’s error clearly if we ask ‘Why do foreign producers first ship their goods to the U.S. rather than directly to these goods’ ultimate destinations?’  The answer must be that there is value to foreign producers in transshipping their goods through the U.S. Therefore, supplying transshipping services is a valuable American contribution to the global economy.

Such transshipments require the specialized services of American ports and warehouses – specialized services for which foreign merchants pay.  To conclude that, because transshipment services don’t alter the physical shape or contents of goods, these services aren’t a valuable economic contribution makes no more sense than to conclude that, because the services of truck drivers don’t alter the physical shape or content of goods, the services of truck drivers aren’t a valuable economic contribution.

Just as farmers do not deliver their produce directly to the homes of final consumers but, instead, to warehouses and shippers who add value (and who profit) from supplying storage and shipping services, many foreign manufacturers do not deliver their products directly to the countries of final destination but, instead, to American warehouses and shippers who add value (and who profit) from supplying storage and shipping services.  It would be deeply misleading for the trade accounts to fail to register the value of these services.

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030


My Mercatus Center colleague Dan Griswold makes, in this excellent essay, a point very similar to the one that I make in this letter.


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