David R. Henderson  

Both Sides Gain from Exchange

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My friend and blogging competitor Don Boudreaux writes:

You say that China's agreement to buy more beef from America is "a big win for us." Well, these beef exports from the U.S. are mostly a win for the Chinese people. From the perspective of us Americans, the beef that we export is a cost. That beef is part of what we give up in exchange for whatever it is we'll import with the earnings that we receive on the beef sales. Our true benefit from this trade deal is chiefly in the additional Chinese chickens that we'll now be allowed to import. Yet that's a benefit that we could have - and should have - enjoyed even without Beijing's agreement to let the Chinese people enjoy greater access to American beef.

It's true that the beef exports are a win for the Chinese people. But I don't think we have fine enough tools to know whether most of the benefits are to Chinese people or most are to U.S. beef producers.

Imagine that the Chinese have very close substitutes for our beef at comparable prices. Then their being allowed to buy U.S. beef benefits them but not by a lot. Their gain is called consumer surplus. Imagine (probably contrary to fact) that U.S. beef producers have few options for selling their beef to people other than the Chinese. Then the U.S. beef producers' gain, called producer surplus, is quite large.

I have no prior view on which is larger. I do know, though, that both sides gain from exchange and so when they're allowed to exchange more due to a reduction in the Chinese government's barrier to exchange, that's a win for both sides. So it's not out of line for the person he's responding to to celebrate the win for the U.S. producers..


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CATEGORIES: International Trade




COMMENTS (6 to date)
Don Boudreaux writes:

David,

My point is not about the relative size of consumer and producer surplus. I agree with you that, as conventionally reckoned and measured, the latter might well in any particular instance be larger than the former.

My point, instead, is that the gains from the increased exports of beef are captured chiefly by the Chinese. (I say "chiefly" only to account for the fact that increased American exports of beef might enable American beef producers to take advantage of economies of scale and, thus, result in greater beef consumption by Americans.) If my point seems too obvious for mention, I mention it frequently because far too many people regard exports as a benefit to the exporter, and to the exporting nation. This fallacy is a bottomless source of misunderstanding and mischief.

But exports are a benefit to exporters - that is, exports generate "producer surplus" - only insofar as they enable exporters to consume more (which, of course, they do by allowing exporters to earn profits on their export sales).

I know that you and I have a friendly disagreement on this issue, with your view likely being the correct one because it is, and has long been, the mainstream view. But as I see matters, consumer surplus and producer surplus are not comparable. The former is more fundamental. Producer surplus is a different animal than consumer surplus. Producer surplus has value to those who capture it only if and insofar as it can be transformed into consumption (now or in the future). If I'm correct, then the benefits of trade are measured ultimately, and only, in the increased consumption that it makes possible. Any increased profits or wages or capital gains made possible by trade have value only if and to the extent that these gains enable those who capture them to increase their consumption.

The producer surplus captured in this instance (by Americans) is in the value of the additional Chinese chickens that we are thereby able to import as a result our greater exports of beef - that is, in our increased ability to consume.

David R. Henderson writes:

@Don Boudreaux,
My point, instead, is that the gains from the increased exports of beef are captured chiefly by the Chinese.
I know that that’s your point. That’s why I wrote this post. I think your point can’t be known to be true without computing producer surplus to American producers and consumer surplus to Chinese consumers.

Thaomas writes:

I'm with David on this one.

The producer surplus (most firms operate at a point at which MRP is greater than MC) is a benefit is exactly the same as a consumers surplus because ultimately it permits more consumption.

The reason to make a big deal about the benefits to exporters is that their political support is necessary for trade agreements that reduce import restrictions. From the import side trade agreements look like tiny benefits to a large number of consumers balanced against more concentrated costs to a relatively few firms and their workers. This can be (as seen in the last election) a losing political perception.

Bill writes:

I love these insightful and concise takedowns of errors in international trade thought that Don, David, and others publish.
I've been reading them so long that I absolutely crush it defending domestic and international free exchange in front of my inlays (the Trump ones and the Bernie ones).
Well, free exchange and a couple bottles of bordeaux help too.
Thanks David and Don

Steve S writes:

As I read Don's post I remembered something I read either here or Cafe Hayek recently. That is, if someone is always mentioning the costs of imports and the benefits of exports, without even acknowledging the benefits of imports or costs of exports, they can almost surely be having an incomplete argument.

This is usually the case in popular discussion of trade, and I just saw Don highlighting the costs of exports since the original author only mentioned the benefits.

Kevin L writes:

I read Boudreaux - as usual - as using the collectivists' argument against themselves. Many people think that a nation, such as the US, "wins" when it exports more. It's important to point out to them that common sense and economic thought both agree that exports are costs to the nation considered as a whole and that imports are benefits to the nation as a whole.

You might say, simplistically, that the benefit of beef exports are not the meats that sail across the ocean, but the dollars that get "imported" from Chinese consumers in return - dollars which can be used to import chicken from China or sea bass from Chile or TV's from Korea or music from Sweden or phone-answering services from Malaysia. Without those dollars coming back in return for beef, the Chinese would be stealing our food.

But just as it's foolish to say that people in China are "taking" our beef, it's foolish to say that they are "taking" our jobs and dollars when they send us goods and services in return.

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