Monday, 15 March 2021

“12 Myths of International Trade"

"As Adam Smith noted more than two centuries ago, a nation can gain from trade whenever a good can be acquired from foreigners more cheaply than it can be produced domestically. When foreign governments subsidise their exports to us, they are subsidising [New Zealand] consumers. Of course, the subsidies are costly to the taxpayers funding them. With time, they are likely to tire from the burden and bring the subsidies to a halt. If foreigners are subsidising their producers, some argue we should do the same. This makes no sense. Merely because foreigners are wasting their resources propping up inefficient suppliers is no reason for us to engage in the same folly. As with other trade restrictions, export subsidies will channel more of our resources toward production of things we do poorly and away from things we do well. A smaller output and lower level of income will result. Put simply, neither individuals nor nations can expect to get ahead by spending more time producing things they do poorly."
~ from “12 Myths of International Trade,” a June 2000 Staff Report of the US Joint Economic Committee. This paragraph probably written by Jim Gwartney

"It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy. The tailor does not attempt to make his own shoes, but buys them of the shoemaker. The shoemaker does not attempt to make his own clothes, but employs a tailor. The farmer attempts to make neither the one nor the other, but employs those different artificers.
    "What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better to buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage."
~ Adam Smith, Wealth of Nations


“Hence it is not enough to establish the technological feasibility of a production plan; it is also necessary to determine its economic cost – that is, the value of opportunities forgone by this plan. The complexity of deliberately tracing out such cost implications of each plan necessitates that this be done unconsciously by relying on the information supplied by a price system.”
~ Don Lavoie, Rivalry and Central Planning, Cambridge University Press, 1985, p. 148

[Hat tip Don Boudreaux]


  1. In regards to the first quote, it's true of course that when aggregated over the entire national economy, the nation who's the recipient of subsidised exports benefits from other countries subsidies. But what do you say to the industries that can't compete against subsidised goods, who ordinarily would without tariffs? They are certainly not benefitting on an individual level, and can have their businesses destroyed purely because of subsidies imposed by a foreign government.

    Is there a case here for the recipient government to act against the subsidised good in some way - if not by imposing it's own tariffs, at least banning the import of foreign subsidised goods? Aside from defending the interests of it's own competitive industry, that particular industry could be in the security interest of the wider nation (eg: the US having a viable defense industry at home, rather than buying everything from China).

  2. The argument would be along these lines.

    Bastiat suggests the good economist should look at the *long-run* effects on *all* groups. So let's try doing that.

    If Government A chooses to pay us to buy our goods from their Industry X, (an export subsidy essentially being a bribe to foreign consumers), there are four main groups affected if our Industry X were to close -- owners, employees, other industries (Y and Z) that buy from this one, and consumers who buy the final goods in this production chain.
    **Now, Owners in X might well lose their shirts. But that's a risk of business -- and no reason for the taxpayers of a Government B to subsidise them. Some of those owners will move their capital into other Industries; some of their managers will sniff the wind too, and search for opportunity in other Industries. So new capital and new skills are now available for other Industry.
    ** Because the final goods (of chain X,Y,Z) are now this much cheaper as a result of the bribe, consumers have more in their pockets to spend elsewhere. So all other industries (say U, V, W, Y and Z) will benefit, to that extent, from this increased custom.
    ** Because those firms using the products of Industry X can now buy them that much cheaper (i.e., those in Industries Y and Z) these firms all enjoy the additional benefit of better profits as well as the increased demand, even as the price of their final goods gets cheaper. Absent regulations that create barriers to entry, other firms will also join these other industries in making these cheaper goods -- and these industries (Y and Z) are able to get that much bigger as a result.
    ** All things being equal, some of the producers of Industry X will more to Industries Y and Z, and others may sense opportunity elsewhere. In the long-run the employees of Industry X companies that do this may need to change skills, any may remain employed by them. Others, who are displaced, may join the now-growing Industries Y and Z (growing mainly because their input prices have been made cheaper) , or the now-growing industries U and V (growing primarily because local consumers now have more money in their pockets from X being cheaper).

    So, yes, there will be short-run dislocations. But in the long-run, if regulatory hurdles and labour laws do not slow down the necessary changes, all groups (apart from those few failed owners) have more to spend, there are more goods, and all goods are that much cheaper as a result of Government A's bribe.

    If the bribe is only short-lived, as government bribes can sometimes be, then all industries would need to be sufficiently flexible to change again (or be aware this is a possibility). But if instead they are longer-lived (as they often tend to be), like US subsidies for corn, say, then the best thing for everyone in all groups is to buy their cheaper corn and put our own energy, resources, and labour into doing other things. Like growing grass.

    Security is a different issue. Not one that Uncle Adam addresses here.


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