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More Principles of International Trade

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In my latest column for AIER I discuss three more principles of international trade [2]. A slice:

4. The Benefits of Trade are Found in Its Imports. Exports are Trade’s Costs.

That this truth must be spelled out is itself a sad remark on the widespread (mis)understanding of trade. Popular and political discussions of trade almost universally identify imports as costs and exports as benefits. The notion is that receiving imports is the price that we in the home country pay in order to enjoy the benefit of sending out our exports. In trade negotiations, when one government agrees to allow its citizens to import more, that government is said to grant to other governments a trade “concession.”

This notion is worse than false; it’s downright wacky.

Dan Ikenson reminds us [3] that “Milton Friedman liked to point out that exports are things we produce but don’t get to consume, while imports are things we consume without having to produce.” Indeed so. Exports are a cost; imports are a benefit.

To say that exports are a cost is not to say that they’re undesirable. But the desirability of exports is found in the goods and services that they enable us to consume. If exports brought us no imports, they would be all cost and no benefit. Put differently, exports are a means; imports – that is, the goods and services that we receive because of our exports – are the end. That the means in this case are justified by the end does not transform the means into the end.

An easy way to distinguish means from ends, or costs from benefits, is to ask yourself this question: ‘If I must give up one side of a transaction and keep the other side, which side would I give up?’ The side you’d give up is the means – it’s the cost; the side you’d keep is the end – it’s the benefit.

So in the context of international trade, would you (if you live in America) prefer that Americans give up importing while continuing to export, or that Americans give up exporting while continuing to import? The answer should be obvious. If we Americans continue to export without importing, we’ll enrich foreigners as we impoverish ourselves. In contrast, if we continue to import without exporting, we’ll be enriched by goods and services received from foreigners for which we sacrifice nothing.

Experience informs me that some of you are as yet unconvinced. So modify the question modestly: Which of the following options would you prefer? Option 1: You, personally, give to a foreigner some valuable good that you own and in return receive nothing. Option 2: You, personally, receive some valuable good from a foreigner and in return give nothing?

Option 2 is obviously better for you than is option 1. And because all international trade is conducted by persons just like you, the benefit side of each international trading transaction is found in the goods or services that the trader receives in exchange for the goods or services that the trader gives up.