A Rare Disagreement with Veronique de Rugy and Don Boudreaux about International Trade

I think I disagree with your disagreement. Although it is probably just semantics.

In particular, potential exporters wouldn’t like it because they would like to make money by exporting.

But, why do exporters want to make money? Isn’t it to buy goods and services, which in our counterfactual are all being provided by the importer in exchange for nothing? In which case money would have no value?

What if there are huge investment opportunities in the United States, not just in buying U.S. federal government bonds but also investing in Apple, Microsoft, Meta, etc.? And what if, as is true, there is a world demand to hold U.S. dollars? Then exporters in other countries could take the money they earned on exporting to us and invest it in the United States or hold it as dollars.

Aren’t those all exports? Anything of value that a foreigner gets in exchange for a product or service they provide us is an export. It may not be included in the trade stats, but I think that is more a problem with the measurement.

I, not surprisingly, disagree with David on this issue. (A rare and uncomfortable sensation!)

One preliminary issue – highlighted by Pierre’s comment – is that speaking in terms of countries trading creates a fundamental misimpression. Countries don’t trade; only individuals trade (although they often do so in groups called “firms”). In my ideal world, we would never talk or write with this collectivist misapprehension. But my ideal world isn’t in the cards; for the foreseeable future, people will continue to talk of countries as trading with each other. We’re stuck with this confusing short-hand.

Now to the core issue. Vero’s point – with which I fully agree – is simply that producing and selling is a means while consumption is the end. That’s all that is meant when someone says or writes in this context that exports are a means and imports are an end. And I don’t see how this claim can be sensibly denied.

Each individual that sells something does so not because that action in and of itself yields utility; that action is not the ‘end’ of the economic plan. The end of the economic plan that gave rise to the act of production and sale is what that individual expects to receive in return – that is, what that person buys, or what that person imports.

It’s true that the individual exporter – call him Smith – might have no interest in importing. Doesn’t matter. Smith gets paid in money that he will ultimately spend on consumption goods or services. Even though every consumption item Smith purchases is purchased from a fellow citizen, Smith’s act of exporting was not an end; it was a means.

Continuing on: Because Smith (by assumption here) wants to purchase nothing from foreigners, he’s willing to export only because he’s confident that one or more fellow citizens wants to purchase something from foreigners. Smith exports and then exchanges his foreign-exchange earnings for dollars. (Assume that Smith resides in America.) But the only reason anyone gave Smith dollars for foreign exchange is because that person wants to import. This person – call her Williams – produced and sold something to obtain dollars and, upon exchanging those dollars for foreign exchange, spent that foreign exchange on imports.

Although in the foreign transactions here the exporter is a different person than the importer, it remains the case that the export is a means that made possible the attainment of the end – that is, the imports.

…..

What individual would not like to have the opportunity to acquire what he or she acquires in the market at lower prices? I think that such a person doesn’t exist. So how much lower the prices? Well, down to zero.

Here’s how we can be sure that exports are a means and not an end: No one would export unless he or she is paid to export. Here’s how we can be sure that imports are an end and not a means: People pay to import and do not have to be paid to import. This reality is all that Vero means, and it’s all that is meant by Milton Friedman and the countless other economists – including me – who’ve said and say the same thing.

David is correct that means such as work effort, selling, and exporting have value. But they are valuable only as means; more precisely, their value is imputed back to them – and exists – only from the ends that these means achieve.

Jones sells in order to buy. Selling is the means, acquiring what is bought is the end. This fact doesn’t change if the party to whom Jones sells or the party from whom Jones buys is in a foreign country.

Just curious, if a foreigner visits do the expenditures of tourists count as exports? Tuition paid for education services? Physical real estate?

Then exporters in other countries could take the money they earned on exporting to us and invest it in the United States or hold it as dollars.

The US has no need of investment from abroad. As Michael Pettis explains, it just crowds out US domestic savings instead.

In the United States, business investment is not constrained by the scarcity of capital but primarily by demand. Indeed, American businesses sit on substantial piles of liquid assets, amounting to $6.9 trillion—approximately 12 percent of their assets, even after engaging in substantial acquisitions and share buybacks. Since 1970, the liquid asset share of total assets held by American businesses has risen sharply (see Figure 4). In such a context, in which investable capital is abundant, the economy is unable to absorb excess capital as productive investment. As a result, excess capital from abroad crowds out domestic savings. Thus, although the United States should in theory have a high savings rate (because the U.S. has a high level of income inequality and the rich save more of their income than the poor), the United States in fact has a low savings rate at 19 percent compared with 27 percent for the world.

However, the United States has become the world’s top destination for excess global savings, because American assets, such as factories, farmland, apartments, and stocks and bonds, are highly valued abroad due to the United States’ flexible financial markets, robust corporate governance, and friendliness to foreign capital. As a result, much of the world’s trade surpluses have been externalized into the United States in exchange for assets. Because of this, and because the U.S. allows the free flow of capital into its borders, the United States has become a persistent net importer of foreign capital, pushing down its domestic savings rate. As seen in Figure 5, prior to around 1980, the U.S. capital account was roughly balanced, before turning deeply negative amid policy changes that allowed the free flow of capital into the country.

A number of mechanisms can cause foreign capital inflows to force down the U.S. savings rate. One of them is a rise in unemployment. As the emergence of a trade deficit forces U.S. imports to rise relative to exports, a portion of demand formerly directed toward domestic factories moves to foreign producers, without a compensating increase in demand from abroad for U.S.-produced goods and services. As a result, American producers are forced to lay off workers. Because workers must consume, regardless of their employment status, production falls faster than consumption, reducing the savings rate. Unemployed workers tend to have negative savings rates, as they must consume but typically have little to no income.

Trade Intervention for Freer Trade