Issues & Opinions

Last Saturday (Mar 31) Reuters published a story entitled “China demands U.S. scrap anti-subsidy duties“. I’m a huge fan of free trade, primarily because I flatter myself for my inherent (inherent!) intelligence in realizing that free trade, pretty much by definition, isn’t likely to be confused with a box of your favorite chocolates in every single transaction. Sometimes you win, sometimes you win less, and sometimes you lose. It’s all about competitive advantage. Union members and other naysayers, including many in the US Congress, notwithstanding, there are places, other than in the United States, where it’s possible to create goods and provide services inexpensively enough that the distance over which those goods and services have to travel in order to be consumed still makes them price competitive with the domestic alternative.

Similarly, it’s less expensive, partly due to increased likelihood of agricultural success elsewhere, for the residents of, say, the state of Ohio to acquire their oranges from California or Florida. Why? Primarily because there are no vast orange groves in Ohio, due to climate and the resultant “best use” of the farmland available there. But that’s too easy a case, right? After all, to an Ohioan, in circumstances other than the NCAA Football National Championship or the NCAA Basketball National Championship, Floridians and Californians are part of “us”, right? I’ll put aside the obvious answer (‘No, not really. Why would you say that? How do you define “us”?’) and stipulate for the sake of argument that I understand and agree with such an assertion.

What about examples of consumables that are equally manufacturable within the US? Some non-climate related commodity, like steel? Or a non-agricultural service like a call center? Or finished goods such as Chinese knickknacks or Taiwanese computers? They’re all able to compete, absent protectionism, on price, features, availability, or all three, not because of their home climates, and not because they can only be produced in their respective countries, but because of their home-countries’ cost structures. Access to raw materials (commodity or human resources) is important, and the cost of those inputs to the process is equally important. The result, in many cases, is a finished product or service whose utility-to-price ratio is higher than the utility-to-price ratio of the corresponding product produced locally in the US.

It seems pretty straightforward, examined in a vacuum. Of course, we don’t live in a vacuum – there are effects other than lower cost that result from such transactions, such as the possibility of lower local employment in the industries which produce those goods locally. Competition is hard, as it should be, otherwise everyone would be good at it. Some, when faced with the reality of competition, prefer to have the game called off, and those are the core of the naysayers’ group referred to above.

In any competition, you’ve got two choices if you want to improve the utility-to-price ratio. Lower the price, or increase the utility. Complaining about the unfairness of the situation, while a common tactic, does nothing to increase that utility-to-price ratio, and only serves to increase costs in the local market.

One of my favorite writers on this topic is a French gentleman who died, too young, in 1850. His name was Frederic Bastiat, and he has been aptly described as “a French economist, legislator, and writer who championed private property, free markets, and limited government.” Among his most potent writings, in Economic Sophisms and elsewhere, he used light satire to make his points. For instance, regarding the tactic above (which I choose to label illegitimate), “complaining”, from the front page of the biography linked above:

Bastiat was a genius at explaining all these economic principles and outcomes by the use of satire and parables, the most famous of which is “The Candlemaker’s Petition,” which “requested” a law to mandate “the covering of all windows and skylights and other openings, holes, and cracks through which the light of the sun is able to enter houses. This free sunlight is hurting the business of us deserving manufacturers of candles.”

Absurd on its face. Weak complaint, I think you’d agree. And totally made up for the purposes of making his point. But it’s not too different from the other, real-world complaints that existed in Bastiat’s time and continue to exist today.

Most of the arguments over unfair trade are simply complaints designed to prevent the entry of a better situated competitor into a market. Some, of course, are not, based instead on “anti-dumping” or “anti-subsidy” regulations. Among the most high-profile recent examples of the “complaint” variety, I’d include the steel tariffs implemented by the Bush administration in 2002 and the shrimp tariff imposed on Vietnamese producers, solely because their production methods reduced the denominator in the utility-to-price ratio. Other examples exist, of course. And while I can’t think of very many high-profile cases of anti-dumping tariffs that didn’t have at least a whiff of protectionism, I suppose that the investigation reported last week (Mar 29) regarding Chinese exports of “steam activated carbon” could qualify as legitimate. The current case, and China’s demand that the US reconsider its “anti-subsidy” tariffs, may likewise be legitimate. Doubtless, there are other examples, whether they’re high-profile or not.

Here’s the problem. When legitimate or nearly-legitimate cudgels exist for trade sanctions, they’re often misused at the behest of politically powerful industries, companies, or lobbyists. When your favorite tool is a hammer, all problems can begin to resemble nails. And the existence of the occasional legitimate trade action seems to agitate all the rubes, and to cause them to consider any competition from “them” (whomever “them” is) to be unfair, illegitimate, or gosh! just not in our national interest.

And why might they not be in our national interest? Such claims often center on one of four effects:

• Loss of crucial national capability (defense, aerospace, large-scale manufacturing, technology, finance, you name it)
• Shifts in local markets, resulting in displacement of labor and capital resources
• Lowered standard of living, including consigning workers to “McJobs”
• Ill effects on our national balance of trade

Rational response to each of these is beyond the scope of this no-longer-quite-so-short post, but at a high level, can be summarized as:

• Sometimes a legitimate concern, but most often not, and instead a feeble crutch used to advance other goals on the list (see Dubai Ports World)
• Business is full of risks, market, competitive, and otherwise, and managing those risks, by proper strategy and resource allocation is what managers are paid to do. One way for them to do so is to hedge their bets geographically, another is to seek to provide goods not available elsewhere, and a third is to improve the utility-to-price ratio of their offerings.
• Workers can be redeployed, and if government assistance to do so is required, then so be it. Wages in the US are “sticky on the upside” for most labor, making it hard to lower them, but lower levels of labor headcount can affect the price of goods, and should be allowed to do so. Lowered standard of living, by the way, is a two-sided coin: the same strategic sourcing choices that businesses make to lower the denominator in their utility-to-price ratio have the effect of lowering the cost of living for workers, a fact that’s easy to forget.
• Balance of trade is a concept that only matters for a country that has no plans to ever improve its service offerings, thus becoming a net exporter at some time in the future. Looking at, and evaluating, trade “wins” and “losses” based solely on their instantaneous costs is a violation of the “single transaction at a time” evaluation fallacy, and is to be avoided by anyone pretending to looking intelligently at the effects of trade

Oh, and regarding the balance of trade? My favorite dead economic satirist had an example (paragraph 1.6.11) more succinctly summarized in the Ludwig von Mises Institute’s biography of the man:

Another of Bastiat’s most memorable satires is his destruction of the protectionist argument that a “balance of trade” is necessarily desirable. A French merchant is said to have shipped $50,000 worth of goods to the U.S., sold them for a $17,000 profit, and purchased $67,000 worth of U.S. cotton, which he then imported into France. Since France had therefore imported more than it exported, it “suffered” an “unfavorable” balance of trade. A more “favorable” situation, Bastiat’sarcastically wrote, would have been one where the merchant attempted a second transaction in the U.S., but had his ship sunk by a storm as it left the harbor. The customs house at the harbor would therefore have recorded more exports than imports, creating a very “favorable” balance of trade. But since storms are undependable, Bastiat reasoned, the “best” policy would be to have the government throw all the merchants goods into the sea as they left French harbors, thereby guaranteeing a “favorable balance of trade”!

Bastiat would have a field day lampooning the current agitation in the US for protectionist measures of various stripes. His head might explode, attempting the same in his native France.

Oh, and for any hardy soul who’s hung around long enough to reach the end – that twist I mentioned in the title: As part of the invocation of “anti-subsidy” tariffs on the Chinese “glossy paper” exports, the administration, which claims to “still believe[d] the best way to reduce the U.S. trade deficit was by increasing exports, not by reducing imports.”, had to reclassify China.

[doing so] required the Commerce Department to reverse — so far just for China — a policy that originated during the Cold War against applying countervailing duties on subsidized goods from “non-market” economies.

WTO member or not, China had heretofore been classified as a “non-market economy”, and thus exempt for economic reasons from concerns about government subsidies playing any role in production, exports, or pricing. No longer. In essence, China was given a chair at the grown-up’s table, and then had mashed potatoes thrown into its lap. Nifty move on the part of the administration, though it’s still utterly ill-advised to start a trade fight for a an export market that, while it’s grown significantly in the past several years ($29 million -> $224 million), still represents a nit on a gnat, in the larger picture.