≡ Menu

Quotation of the Day…

… is from pages 3-4 of the 2008 first edition of Robert Feenstra’s and Alan Taylor’s textbook, International Economics (original emphasis; footnote deleted):

[T]he Barbie doll receives plastic, hair, and other materials from a number of countries – oil from Saudi Arabia, plastic from Taiwan, hair from Japan – and then is assembled in China.  The doll is valued at $2 when it leaves the dock in China en route to the United States, but only 35¢ of that amount reflects the value of Chinese labor used in the assembly.  The rest of the $2 export value was actually imported into China from these other countries, but nevertheless, the entire $2 is counted as an export from China to the United States.  This example shows that the bilateral trade deficit or surplus between countries is a slippery concept.  It doesn’t really make sense to count the entire $2 doll as a Chinese export to the United States, as is done in official trade statistics, when only 35¢ is the value-added in China and the rest was purchased from other countries.  This shortcoming of official statistics gives us a good reason to not focus on the bilateral trade deficit or surplus between countries, even though that number is often reported in the press.

DBx: As regular readers of Cafe Hayek know, I believe that far too much attention is paid even to any one country’s balance of trade with the entire world.  But at least a country’s trade balance with the entire world has some economic significance – although significance that is vastly overblown and deeply misunderstood.  In contrast, a country’s trade balance with another country (or with a subset of other countries) is entirely without any economic significance.  Yet such these so-called “bilateral trade deficits” (or “bilateral trade surpluses”) are very easy for demagogues to use to stir up support for trade policies that enrich a handful of politically powerful producer groups at the expense of the very same public that, because it is economically misinformed, supports these crony policies.

Making matters even worse – if such is possible – is the kind of thing depicted in the graph above.  Not only does this graph depict a completely meaningless bilateral U.S. “deficit” with China, it does so only for goods.  Services are omitted.  Measuring a country’s trade of goods with another country – or even with the world – makes no more economic sense than does measuring a country’s trade of, say, yellow things, or of things the English-language name of which starts with the letter “V”, with another country or with the world.  In short, the above-shown graph conveys as much and as sound meaning of economics and of trade as does the graph shown here about a person’s health or character.

Note: the above graph would be no more economically meaningful if it were instead a graph of goods and services.  But the fact that it is of only goods reveals just how very poor is popular and political understanding of trade.  Nevertheless, high government officials and allegedly well-informed journalists continue to report on, pontificate about, and draw conclusions from these so-called “bilateral trade deficits” – and many people treat all of this reporting, pontificating, and conclusion-drawing as if it deserves respect.  Well, it deserves no more respect than do the pronouncements of a palm-reader.