David R. Henderson  

Does Import Dependence Make Us More Vulnerable?

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An increasing reliance on imports, combined with the fraying of the nation's power grid, highways and rail lines, leaves the United States more vulnerable to the damage of natural disasters and terrorist attacks, according to a report to be released Wednesday by former homeland security secretary Tom Ridge.
This is from Peter Whoriskey, "Reliance on imports leaves U.S. vulnerable to disasters, report says," Washington Post, July 24, 2012.

I see why the fraying of U.S. infrastructure makes us more vulnerable. But why should increasing reliance on imports make us more vulnerable? It probably doesn't. Tom Ridge is just spouting bad economics. Here's what economist Ben Zycher has to say about this in his article, "Defense," in The Concise Encyclopedia of Economics:

Modern military forces combine many kinds of manpower and physical matériel. Inevitably, some of these inputs, such as rare metals and electronic components, are purchased from foreigners because they are cheaper abroad than at home. Some worry that foreign procurement makes the United States vulnerable to a cutoff of foreign-supplied items; they fear that cuts in foreign supplies may exceed in both number and variety the potential supply reductions from domestic firms.

This view is misguided. Suppose that some defense good is purchased from foreign suppliers and that this arrangement is subject to easy but unpredictable cutoffs. Suppose, also, that such interruptions are easy to insure against, with stockpiles, alternative suppliers in other parts of the world, or excess production capacity in the United States. If so, foreign dependence does not yield vulnerability. The central question, therefore, is not the source of the defense goods but the ease with which interruptions in supply--whether foreign or domestic--can be insured against or hedged. If domestic dependence is more difficult to insure against than foreign dependence, then, ironically, domestic dependence may yield greater vulnerability.

What could make insurance more difficult for domestic purchases than for foreign ones? One possibility is the expectation of price controls during future conflicts. Producers of defense-related goods know that the prices of such goods can rise dramatically when a government at war or preparing for war increases its purchases of those goods. These price increases serve an important function: they reward domestic producers for stockpiling goods in advance, for maintaining excess production capacity, and for increasing production quickly. But domestic producers also know that governments attempting to constrain budget increases and reacting to political pressures on "war profiteering" and the like often impose explicit or implicit price controls on just such goods. The imposition of price controls on petroleum products during some past wars is but one example. Taking anticipated price controls into account, domestic producers would not invest as much in stockpiles or excess production capacity as is optimal for society. Nor are they likely to increase production as much when price controls are imposed. But governments for the most part cannot impose price controls on foreign producers. On net, therefore, foreign producers actually may have stronger incentives to stockpile and to maintain excess production capacity. The "vulnerability" issue is thus far more complex than the common foreign/domestic dependence view suggests.


Zycher's reasoning applies not only to times of war but also to the natural disasters mentioned in the news story. During such natural disasters, governments sometimes succumb to the temptation to impose price controls also.


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COMMENTS (6 to date)

Well... It might make sense to establish long-term contract with people who don't need very elaborate transportation facilities to buy or sell to you.

On the other hand, this has more to do with distance than with imaginary lines on a map. For example, it's probably safer for someone in New York to to deal with someone in Montreal than someone in Hawaii.

Henry writes:

Steven Landsburg made a similar point in "The Armchair Economist", concluding that the best method for ensuring military readiness might be a constitutional amendment guaranteeing freedom from price controls.

Robert Bell writes:

I find this reasoning a little disingenuous:

"Suppose, also, that such interruptions are easy to insure against, with stockpiles, alternative suppliers in other parts of the world, or excess production capacity in the United States."

This supposition just assumes away the question posed by the original article. Seems to me that one could make a case that there are enough alternate suppliers, or that insurance contracts would actually be paid out in a timely manner etc so that foreign dependence is not really a problem, but that case has to be made, not assumed away.

David R. Henderson writes:

@Robert Bell,
Before you throw around strong charges about motives (check the meaning of the word “disingenuous”), I suggest that you at least do Ben and me the courtesy of reading the whole paragraph that contains that sentence.

Robert Bell writes:

David: point taken about disingenuous - I didn't mean that there were underhanded motives. That said, I did read the paragraph, and it does seem to move at right angles to the thrust of the original article, which as a reader seemed to me to about the significant *differences* between domestic and foreign dependence and not their similarities.

"If so, foreign dependence does not yield vulnerability. The central question, therefore, is not the source of the defense goods but the ease with which interruptions in supply--whether foreign or domestic--can be insured against or hedged. If domestic dependence is more difficult to insure against than foreign dependence, then, ironically, domestic dependence may yield greater vulnerability."

In other words, I don't think this was "the central question" as far as the original article was concerned.


David R. Henderson writes:

@Robert Bell,
David: point taken about disingenuous - I didn't mean that there were underhanded motives.
Thanks, Robert.
Re the substantive point, I guess we took very different things out of Zycher. I see him as saying that we shouldn’t just take it as given that having supplies from foreigners makes us more vulnerable. And then he goes on, in the 3rd paragraph quoted, to give one important factor, price controls, that tilt the other way: making us more vulnerable if our supplies are normally domestically produced.

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