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How Transactions that Raise America’s Trade Deficit Enrich Americans

Thursday, October 27, 2016 14:49
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(Before It's News)

(Don Boudreaux)

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Suppose that Smith, your neighbor in New Haven or your friend in Fayetteville, produced a lot of auto parts that consumers voluntarily bought at prices that earned for Smith a sizable fortune.  Suppose further that Smith prudently saves a large chunk of his fortune – a chunk that he uses to start a glass-manufacturing plant in Ohio.

You’d applaud, right?  (You should applaud, both for Smith’s initial success at profitably pleasing with his auto parts millions of consumers and for his later use some of his fortune to create yet additional wealth, in the form of his glass-manufacturing plant, for others and for himself.)  You’d celebrate the jobs created in the Ohio glass-making factory and you’d celebrate the resulting increased supply of glass and reduction in the price of glass.  And if Smith ends up profitably exporting some of his glass, you’d celebrate also his export earnings (because, of course, those earnings increase Americans’ abilities to import).

I suspect that even Donald Trump would celebrate (although he would certainly not grasp the correct reason for celebrating the export earnings).

Now let’s make an inconsequential change to the above example.  The person who earns his fortune by selling auto parts – and then who later invests part of that fortune in a glass factory in Ohio – isn’t an American citizen named Smith but, instead, a Chinese citizen named Cho.

Your applause continues, right?  I hope so.  It should continue, and with no less enthusiasm.

But Trump would not applaud.  Trump’s praise for Smith would turn into harsh, bellowing criticism of U.S. and Chinese-government policies that permit Cho to make this investment.  Because Cho’s investment in the glass factory in Ohio would cause America’s trade deficit to rise, Trump would screech that China is “killing us” and is “stealing our jobs.”  Most pundits and other politicians would nod their heads in agreement, even if many dislike Trump’s stridency and prefer policies different in detail from those favored by Trump to address this alleged “problem.”

Yet economically there is no difference whatsoever between the version of the story featuring Smith and the version featuring Cho.  This lack of difference holds even if we focus our attention and our sentiments exclusively on the welfare of Americans.  The economic consequences of the first (American Smth) version of the story are identical to the economic consequences of the second (Chinese Cho) version.  Yet Trump and many other people react to real-world instances of the second version in quite the opposite way from the first version.

This difference in reactions is sufficient to prove that Trump and each of the many others who react as he does is economically uninformed.

The version of the story featuring Cho is true.  Cho Tak Wong, who is now 70, was raised in dire poverty in Maoist China.  After liberalization, he earned a fortune, chiefly by selling auto parts.  Rather than spend all of his fortune on lavish living, Cho saved some of it and invested much of what he saved in a glass-manufacturing plant in Ohio.  Today that factory employs American workers and produces outputs of glass.

Why should, why does, anyone care that Cho is Chinese rather than American?  There is zero reason to care, despite the fact that because Cho is a citizen and resident of China the transactions of which he is here a part raise America’s trade deficit (whereas were Cho a citizen and resident of the USA, America’s trade deficit would not be so raised).

….

(It’s true that Cho took advantage of the government of Ohio’s mercantilist policy of using taxpayer funds to attract investments.  The value of what Cho got from this source is $10 million – about two percent of the half-billion that he used to renovate the Ohio factory.  I oppose such mercantilist schemes.  If this scheme was necessary to get Cho to make this investment in the U.S, then this investment ought not – economically and ethically – have been made.  But I suspect that because taxpayer largesse to Cho is such a small percentage of his Ohio investment, that he’d have nevertheless renovated the factory in Ohio.)

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