by Pierre Lemieux

Regarding the offer of the Chinese government to force or incentivize (or stop disincentivizing with import barriers) Chinese importers to buy $70 billion more in food and energy products from America, a story in the Wall Street Journal of June 5 says:

U.S. officials … argue that Chinese energy purchases would largely divert U.S. sales to other nations and have no overall impact on the U.S. trade deficit.

The problem is much deeper than what these U.S. officials believe. Anything imported from America by Chinese firms or consumers is diverted from others, whether from other international importers or from American producers and consumers. The resources going into anything exported from America to a foreign country could have been used to produce goods for the residents of other countries or for Americans. (Exports are, by definition, the use of domestic resources to produce goods and services for foreigners.) The increased corn exported to China could be used instead to feed Americans or animals that American eat.

I can imagine two ways around this. First, if there are unemployed resources (labor, land, machines, steel), they could be put to work to produce more stuff for the Chinese–a Keynesian sort of argument. But it does not contradict my argument above, because these resources could also be put to work to produce more stuff for Americans.

The second case would be constant returns to scale in the industries producing supplementary exports to China. Assuming this is true (a big assumption, even more so in the short run), American resources would still be diverted away from Americans or from other export industries. Producing more corn or soybeans requires resources that can’t be used to produce other goods and services. Americans will have fewer hamburgers because burger flippers will have gone to mine coal or work on farms.

To import more, Chinese importers would probably have to bid up the prices paid to American producers, which means that some American consumers or firms would reduce their quantity demanded. This is another mechanism by which what is exported to China is not consumed by Americans.

This raises the question of why “we” export. The answer is that “we” don’t, except in a highly and dangerously metaphorical way. Some American laborers, capitalists, and land owners export, because they have a comparative advantage in what they produce and they can profitably supply more than what Americans want at world prices. Some other Americans import from China using the yuan that Chinese importers dump on the foreign exchange market in exchange for dollars they need to pay American suppliers. An equivalent answer is that “we” export corn in exchange for toys, and both “we” and “they” get more corn and more toys than otherwise possible–which is another way to see comparative advantage.

Trade necessarily divert resources, but it’s to the benefit of both buyers and sellers, on each side of the political border. When government intervenes, the benefits are reduced on both sides, and the more so if each side’s government intervenes.