David R. Henderson  

Is There an Asymmetry in Benefits from Trade?

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Don Boudreaux has written one of those rare letters that I don't quickly agree with. He writes:

Discussing expanded American trade with the Chinese, President Obama told a business group in Honolulu "those are potential customers for us in the future" ("Obama Sees an Opening on China Trade," Nov. 13).

Yep. And a bigger pool of customers is indeed good because in many industries it encourages larger-scale investments and R&D projects that allow firms to produce and sell at lower per-unit costs than are possible with only a smaller pool of customers.

But with his comment Mr. Obama singled-out the least-important benefit of American trade with China. Had he instead singled-out the most-important benefit he would have said instead about the Chinese people: "those are potential producuers for us in the future."


If all Don said was that Obama left out a huge gain from international trade--the gain to consumers--I would have agreed with him instantly. In fact, I wrote about that in Fortune magazine in 2000. But that's not all he said.

We generally measure gains from trade by adding the producer surplus--the area between the supply curve and the price--to the consumer surplus--the area between the demand curve and the price.

For Don's statement--that the gains to U.S. exporters are substantially less than the gains to U.S. importers--to be true, demand curves for imports would have to be consistently less elastic than supply curves of exports. Are they? Maybe, but I'm not seeing it.


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CATEGORIES: International Trade



COMMENTS (8 to date)
Jonathon Hunt writes:

I've never understood how one could attempt to objectively measure a subjective phenomena such as exchange between two individuals operating in different countries, whom each value the exchange differently. Consequently, I've never understood the economic nationalism that is the talk about national trade accounts.

William Bruntrager writes:

I'm pretty sure Don's point is that ultimately the important question is not, "How am I going to get rid of all this stuff I just produced?" but rather, "How can I get more stuff?" It's not a matter of curve elasticity.

Don Lloyd writes:

Exports are costs, not benefits, from the POV of the entire economy, only being benefits to the extent that they fund beneficial imports, by preventing the buildup of foreign holdings of dollars and the resulting increases in the dollar prices of imports. Producers almost certainly marginally benefit from their exports, but at the expense of seriously depleting the domestic supply of resources, both material and human, and increasing their market prices.

Adding the producer surplus without accounting for the loss of resources to the domestic economy due to exports doesn't seem to make any sense.

Regards, Don Lloyd

Eeyore writes:

Don said "most important", not "greatest surplus".

We sell in order to buy, and produce in order to consume, thereby making one of those things "most important".

David R. Henderson writes:

@Don Lloyd,
The supply curve accounts for the opportunity cost of those resources. The producer surplus is the amount over and above that cost.

Don Boudreaux writes:

David,

I take your point. Let me first be defensive: in challenging, in a letter-to-the-editor, such statements by the likes of a U.S. President, my goal (arrogant as that might be) is to tackle what I regard to be additional fuel thrown on the blazing fire of economic ignorance. Most people believe, at some level, that exports are good and imports bad. Obama - being an expert politician - played on that sentiment. That sentiment is mistaken, and its widespread acceptance helps pave the way for protectionist interventions.

Now to be more substantive: in our current world of national fiat currencies, what do U.S. exporters receive in return for their export sales? Either foreign currencies or U.S. dollars.

If the former, those currencies are valuable only insofar as they can be redeemed today on the current account for imports from abroad, or today on the capital account for investments abroad (which, presumably, are made so that more imports in the future will be possible).

If the latter, foreigners had to acquire those dollars somehow, and they did so largely by supplying imports to Americans.

So the U.S. producer surplus that you speak of is redeemable - is transformed into "utility" - only (or, certainly, overwhelmingly) through more U.S. imports.

(I must say that I've never been comfortable with the notion of producer surplus; it's always seemed to me not to be comparable to consumer surplus - given that the latter conveys some notion of directly achieved satisfaction of the sort that economies are supposed to supply ultimately (that is, utility), while the former must first be transformed into consumer goods and services before it can be said to achieve the sort of desirable gains that are comparable to consumer surplus. But this is a discussion for another day.)

Either way, thanks!

Karl Smith writes:

Don is basically right though I would say it differently.

The supply and demand analysis that David is using is partial equilibrium. However, partial equilibrium analysis will give you extremely misleading answers when dealing with international trade.

The reason is that "producer surplus" stems from the fact that producers gain more command over the goods and services of society that they relinquish. This is why we can measure it in dollars.

However, the only way this can work in an international trade context is if US producers take command over something that China is creating.

They could want Chinese production directly, in which case we are done. Don's point holds.

They could want contracts over Chinese assets. This would be what we would think of as capital investment in China. However, its not clear why they would want that unless they intend to take delivery of Chinese production at some point. Or, sell those assets to someone who will take delivery of Chinese assets.

In both those cases Don's point holds.


The only case where Don's point does not hold is if they want Chinese currency or contract for their "own sake."

This might sound silly but actually its not. Lots of countries do this with the dollar. They want to hold dollars in part as a hedge against Global Financial Risk, partially as a medium of exchange in Global Financial Transactions and partially - in China's case mainly - to induce a restructuring of their internal economy.

China for example, wants to hold dollars in an explicit attempt to drive down consumption among the Chinese people and drive up investment by Chinese firms.

They are not attempting to maximize welfare, they are attempting to maximize real growth. This means that they have to find away to make people sacrifice more than they would naturally be willing to do so.

The way they accomplish this is through exchange rate intervention that depresses the return on Chinese household savings and increases the return on investment in the tradables sector.

Anyway, the US is not pursuing such a policy and has no intention to, so we can safely assume that benefit from trade with China comes from what the Chinese produce for us.

Bob Murphy writes:

David,

I have to agree with Don Lloyd above (and perhaps Karl Smith, though not sure). You and I understand of course how producer and consumer surplus are defined when we draw those cute curves on the board, but they are denominated in dollars. So that's obviously a partial equilibrium analysis.

If we step back and ask how is it that Americans benefit from trade with China, it must be due to an influx of goods from abroad that allows us to redeploy our own workers and other resources such that, when all is said and done, Americans as a whole have a higher standard of living.

From this perspective, the only reason a US exporter would care about sending more goods to China, is that this allows him to end up consuming more goods (that don't necessarily have to be made in China or even the US for that matter).

So, in the grand scheme, I think Boudreaux's letter is basically right, and that if we ended up doing a full-blown general equilibrium analysis with all the i's dotted and t's crossed, the result would be closer to his letter than your blog post.

(None of this should be construed as a criticism. You guys were both in the running for today's Bastiat...)

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