Unlearn what you know about exports

Unlearn what you know about exports

As trade talks with China pick up again in Washington this week, President TrumpDonald John TrumpREAD: Transcript of James Comey's interview with House Republicans Klobuchar on 2020: ‘I do think you want voices from the Midwest’ Israel boycott fight roils Democrats in year-end spending debate MORE continues to insist on reducing America’s trade deficit by increasing exports. But how many of us have stopped to ask ourselves: What’s so great about exporting? 

It seems obvious, but in order to think about international trade in economic terms — not in political terms — one has to first unlearn a couple of things. One is that exports are intrinsically good. They are good (we’ll get to that later), but it’s not quite that simple.

ADVERTISEMENT

To understand why, it’s helpful to look at things another way first:

 

Think about Americans who work in domestic plants that manufacture cars for export to China — worth about $10 billion in 2017. This price mainly includes the wages of American workers and the cost of the buildings and machines they use. All these American resources — labor, car factories, etc. — are being used to manufacture cars for Chinese consumers.

Or consider American workers and businesses who provide goods and services for Chinese tourists and visitors in America. Those sales are recorded as exports for the same reason as the cars: They use American resources to produce things for foreigners. Chinese visitors spend some $33 billion every year in America, on things ranging from air fares and hotel rooms to education to souvenirs.

So, should American labor and capital be used exclusively to make things for American consumers instead of foreigners?

As you’ve probably already said to yourself, the answer is obviously no.

Americans use their resources to sell things to foreigners because the latter pay for what they get. Foreign importers (including tourists) add their demand to that of domestic consumers and bid up the prices of goods and services produced by Americans. American producers win.

The downside is that Americans consumers pay more for domestic products than they would if, for example, they were the only ones buying American cars or oilseeds. So exports usually benefit a small number of producers (company owners and employees) at the expense of 320 million consumers, some of whom are too young, too old, or too ill to participate in production. 

Once again, can we conclude that exports are bad? We could, were it not for two crucial facts:

The first fact is the American producers who export have what economists call a “comparative advantage” in what they are doing. They do what they can do relatively more cheaply than other world producers. Otherwise, they would not be able to handle foreign competition.

The second fact is that exports allow Americans to import from foreign countries what can be produced cheaper there. If Americans export what they are most efficient at and import what others are more efficient at, we all get more from our resources.

If you are tempted to dismiss this second point, follow the dollars. A domestic firm exports to, say, China. The Chinese importer, who needs dollars to pay the invoice, buys them with yuan on the foreign exchange market, directly or indirectly. This tends to push the value of the dollar up and the yuan down. It thus encourages Americans to import more from China. In a real sense, exports have paid for imports.

Even if the dollars used by the Chinese importer were already in China, they came from previous exports to America. These dollars could, instead of paying for American products, be used to make investments in the United States. The dollars return to America one way or another.

We arrive at a conclusion that economists discovered more than two centuries ago: foreign trade is as good as domestic trade.

It is true that foreign competition, like domestic competition, often creates disruptions: The jobs of some Americans are destroyed but others are created elsewhere in America. During the “China shock” when, from 1999 to 2011, Chinese imports to America grew rapidly, 5.6 million net jobs took hold in America. And this happened despite the job-destroying Great Recession late in that cycle. More importantly, real American GDP per capita, a measure of our standard of living, increased by 26 percent.

So, as for our original question: Exports aren’t the answer to every trade dilemma. But they allow Americans to make the best use of resources and, thus, to earn incomes with which to buy what is made cheaper elsewhere. That’s how prosperity is generated. 

Pierre Lemieux is a senior affiliated scholar with the Mercatus Center at George Mason University and author of the new book “What’s Wrong with Protectionism?”