March 31, 2010

What’s wrong with American trade? In short, the people America has negotiating its trade agreements. One Robert E. Lighthizer, a deputy trade rep under Reagan, took to the New York Times this week to tells us all what was wrong with current and recent trade policy. What he managed to show is that if people holding these sorts of views are the ones negotiating trade pacts on our behalf then we’re all ruined.

I’ll just start with his gross misconception of the effects of VAT. His claim is that because you don’t pay VAT on exports but you do on imports then countries which have a VAT unfairly subsidize exports. This is what is known in technical circles as “€œinsane”€. A VAT is a sales tax and in the US sales taxes are not imposed upon exports and they are upon imports. Further, he claims that the US relies mostly upon income taxes for revenue while the countries that have VATs rely mostly upon that VAT. He seems not to realize that the VAT is, just like sales tax, imposed on top of all of the other taxes.

But that isn’t his really great and grand mistake. No, he’s committed the ultimate sin in the consideration of trade and production. All of his complaints are about how current trade rules make things difficult for producers and exporters. All of his desired actions are about how to make things easier for producers and exporters. All of which is entirely the wrong way to think about either production or exports.

We don’t run the economy for the benefit of producers and we most certainly shouldn’t run it for them. The aim is to give consumers the maximum possible satisfaction given current resources and technology levels. Adam Smith pointed this out so it’s hardly a new idea: the sole purpose of any and all production is consumption. So if, as Mr. Lighthizer complains, China subsidizes its exports, this is a benefit to the American consumer. Our correct answer to this is to say “€œThank you, please may I have some more”€ (or, as Calvin Coolidge allegedly said, when the messenger delivered to the Oval Office his first paycheck as President, “€œThank you. Please come again”€).

“There’s a very simple point to be made about trade. Imports are going shopping. Exports are just the shit we do so we can go shopping.”

All of his evidence falls afoul of this wildly incorrect viewpoint. Developing nations are growing faster than the US and therefore we shouldn’t open American markets to them. What? What has that to do with trade? The aim and point of trade is to give American consumers access to the glories of world production, not to give American producers the ability to sell to the world. All the talk of market opening offers not being made, of different labor and environmental regulations elsewhere, of again Chinese currency manipulation. They’re all entirely irrelevant.

They are, quite simply, nothing at all to do with what America’s attitude toward trade should be. That attitude is, again quite simply, that some people out there in that great big wide world are making things which are better, cheaper, different, sexier, than what is made in the US and Joe Six-Pack and his wife would quite like some of it please. And it ain’t the business of government to stand between Joe Six-Pack and what he and his wife would like. That other governments deny their own citizens the bounty of American production is an irrelevance. As the late great Cambridge economist Joan Robinson, said, just because someone else is throwing rocks in their harbors doesn’t mean we should throw rocks in our own.

And this ignorance of the very point of trade is what has made America’s trade policy so dysfunctional over the decades. That we’ve got someone arguing these things, as Mr. Lighthizer is, who was a trade rep for the country, as Mr. Lighthizer was, is simply appalling. It would be like appointing a trade union leader because he says the point of trade unions is to lower the workers’ wages. Appointing a General who said surrender is the best means of defence.

There’s a very simple point to be made about trade. Imports are going shopping. Exports are just the shit we do so we can go shopping. Unless and until America’s trade representatives understand that point then we’re always going to have an entirely dysfunctional trade policy.


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