David R. Henderson  

What's Wrong with Trade Restrictions in One Graph

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Timothy Taylor, at the Conversable Economist, has an awesome graph (reprinted above) and an excellent discussion of trade in the modern world.

We often picture some companies producing for export but using as inputs almost entirely domestically produced items. Wrong!

His post is titled "What If US Importers and Exporters are Largely the Same?" If you don't have time to read it, at least let this graph sink in.

The obvious implication: If the feds raise the tariff on imports, then the cost of producing many exports will rise. So, for example, if the feds impose a tariff on steel imports, the cost of producing cars will rise. (Although not as much as you might think because cars have way less steel in them than they used to--but the point remains.)

We've known this for a long time. There was a whole literature, to which my undergraduate International Trade professor at the University of Western Ontario, J. Clark Leith, contributed, on effective rates of protection. This literature dealt with this point. But the literature, if I recall correctly, wasn't so granular. Also, that was over 40 years ago, when trade and international supply chains weren't nearly so extensive. Here are an NBER study (gated, unfortunately) and a published article that are behind this graph.

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CATEGORIES: International Trade

COMMENTS (9 to date)
Hazel Meade writes:

This is a good point I've been trying to make to others when it comes to the topic of free trade.
Many people often assume that the only people purchasing imports are domestic end-user consumers - people buying cheap crap from China, in other words, and that if those imports were restricted they would just buy from American producers and American workers would have jobs.

Proponents of free trade often get caught up arguing that point - consumers lose in order to benefit working class labor.

But we lose track of the fact that many of the people purchasing imports are using them to produce products for export. In other words, the importers are just a different group of workers.
If we raise the cost of imports, those exports become more expensive. Many people can see the illogic in the idea of having a completely domestic supply chain for export - it would obviously be inefficient and put American exporters at a competitive disadvantage - even if they don't see the logic in making imports less expensive for US consumers.

In other words, people who are biased to believe that exports are more important than imports (that trade is zero sum and that the trade deficit is a problem) are going to be more receptive to the idea that trade barriers hurt American exporters than that they hurt American consumers.

Michael Rulle writes:

Ten years ago I bought my son a Chevy SUV. I wanted to buy American (of course my car was an Audi) because he seemed to like the idea of owning a Chevrolet---a traditional American car. I remember reading the car sticker and I was rather embarrassed for myself when I realized how global commerce had become.

I don't remember all the specifics, but I recall the transmission was made in China, the engine in America, the tires in Asia and the assembly in Canada. Who knows how many different countries various parts come from and which companies produced them.

I would like to believe our trade policy experts are aware of these issues as they make plans for "better trade deals"---which theoretically can happen. Companies are global but countries are local (?)---that is ......odd.

Don Boudreaux writes:

Mr. Rulle: If you'll pardon some unpardonable self-promotion on my part, here's a video that I helped put together in 2009 for Reason on the very topic you mention about your son's 'American-made' car.

David R. Henderson writes:

@Hazel Meade and Michael Rulle,
Good points.
@Don Boudreaux,
Thanks for this link. I had seen it at the time and enjoyed it. You’re pardoned.

Hamburg economist writes:

Good points, but I have to acknowledge that it took some time for me to understand the graph. Maybe there is a way of illustrating this relationship a little more intuitively, but I couldn't think of a better way. This could improve the discussion on trade policy, which could prove to be very important.

Yaakov Schatz writes:

Politicians are aware of these problems and therefore create a very complex schedule of tariffs which is declared as being pro-export. It has a very important advantage: it makes sure there is a continuous stream of people coming to politicians to convince them to change the schedule in their favor. This advantage is very important as it helps fund the media, through advertisements for politicians. As we know, free press is very important in democratic countries, in order to call out politicians who favor specific people over others in the tariff schedule.

Thaomas writes:

The rediscovery of the Learner Theorem! Import restrictions are a tax on exports (provided that the Fed is doing its job of maintaining full employment), something that none of Mr. Trump's trade advisors or Mr Trump himself seem to understand.

Lauren writes:

Thaomas, I think perhaps you meant Lerner, as in Abba Lerner?

Andrew_FL writes:

There is indeed a Lerner theorem that relates to international trade, but it doesn't actually have anything to do with the subject of this post so I don't quite get why Thaomas brought it up.

The Lerner symmetry theorem has to do with relative prices, not importers and exporters being largely the same individuals, and it only applies when the trade balance is zero, not when there is full employment-indeed it has nothing to do with full employment all.

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