Kindergarten trade theory

The rhetoric of the out­sourc­ing debate in the USA has nev­er seemed sil­li­er than in this piece from a senior edi­tor of the “Atlantic Monthly(link to the Atlantic on-line)”:http://www.theatlantic.com/unbound/polipro/pp2004-02–25.htm bq. But the pic­ture con­jured up [of] for­eign com­pa­nies dump­ing good­son Amer­i­ca leaves some­thing new out: U.S. firms relo­cat­ing to low-wage coun­tries, pro­duc­ing goods or ren­der­ing ser­vices there, and export­ing them here—American cor­po­ra­tions dump­ing on Amer­i­ca. Absent a wage-equal­iz­ing tar­iff on those goods (or ser­vices), noth­ing will keep such com­pa­nies here. Noth­ing will keep their jobs here. Noth­ing will pre­vent the ero­sion of the Amer­i­can stan­dard of liv­ing. Either we will rec­og­nize social dump­ing as a threat to our way of life as grave as prod­uct dump­ing was to America’s effort to industrialize—or the eco­nom­ic base of the mid­dle class will be destroyed. (empha­sis added) This talk of ‘social dumping’—by which the author means ‘low-wage com­pe­ti­tion’ from abroad—is obscure, alarmist non­sense. The gains in the “gains from trade” come from the wealth that imports bring us. When con­sumers buy the prod­ucts of for­eign labor at low­er prices than domes­tic prod­ucts they are bet­ter-off because they have sat­is­fied one need while keep­ing more mon­ey for oth­er things that they also want. This is not rock­et sci­ence. Any shop­per in Wool­worths or Wal-Mart can tell you this much. Now, here’s the part that is appar­ent­ly too hard for the Edi­tors of the Atlantic. Please look away now if you are embar­rassed by kinder­garten eco­nom­ics. Access to low­er priced for­eign goods means that with a giv­en amount in her pock­et, the con­sumer is now wealth­i­er. She com­mands more pur­chas­ing pow­er. But she and every oth­er con­sumer in the econ­o­my spends much more on domes­tic pro­duce (goods and ser­vices) than on for­eign pro­duce: the val­ue of imports of goods and ser­vices was less than 15% of US final spend­ing i.e. GDP in 2000. So her new-found wealth will be direct­ed most­ly to domes­tic pro­duc­ers. If the con­sumer is allowed to access the ‘out­sourced’ prod­ucts, the whole coun­try is bet­ter off as a result of her greater wealth. So far from lead­ing to a loss of pro­duc­tion (or even jobs), the new wealth due to trade leads to high­er domes­tic expen­di­ture, pro­duc­tion, and (usu­al­ly) jobs. Of course, there are a few oth­er small mat­ters that also deter­mine the lev­el of employ­ment: par­tic­u­lar­ly the offi­cial inter­est rate. But, what hap­pens if the Edi­tors of the Atlantic are allowed to run trade pol­i­cy and attempt to pun­ish com­pa­nies mov­ing off-shore by tax­ing their exports to the USA? One of two bad things: either # the com­pa­nies stay on-shore, pro­duce high cost goods and ser­vices behind the new tar­iff bar­ri­ers so that the con­sumers’ wealth and the nation’s wealth actu­al­ly shrinks because ever­thing now costs more, or
# the com­pa­nies go off-shore any­way, increas­ing the out­put of for­eign economies by pro­duc­ing high qual­i­ty goods and ser­vices at low­er prices than they could in the USA, and every­one but the US con­sumer (the real vic­tim of any US tar­iff) is bet­ter off The only rea­son to export, is so we can import.

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