The world turns even if America doesn’t. That’s certainly true on trade, where a rebranded Trans-Pacific Partnership has begun with the new year in 11 countries two years after President Trump withdrew. The biggest losers are American producers.
The CPTPP, as it’s known, entered into force in Canada, Japan, Mexico, New Zealand, Australia and Singapore last week, where it will slash 95% of tariffs on goods among its members, which account for 13% of global GDP. The others include Vietnam, where CPTPP is in force Jan. 14, and Brunei, Chile, Malaysia and Peru, which are in the midst of ratification.
These are the opening two paragraphs of a Wall Street Journal editorial titled “America’s Lost Markets,” January 6, 2019 (January 7 print edition.) Underneath the title is the following summary of the article: “The Pacific trade pact is up and running, and U.S. exporters are the losers.”
Here are two later paragraphs:
Despite the U.S. withdrawal, member economies still stand to make significant gains—some $147 billion in global income benefits, according to the Peterson Institute for International Economics. The research finds Malaysia and Singapore would see additional increases of 3.1% and 2.7% in real income by 2030, respectively. According to another estimate, Vietnam will see textile and apparel exports grow $3 billion among CPTPP countries.
Canada is due for a larger GDP boost than if the U.S. had remained in the pact, and that comes largely at the expense of U.S. farmers who are likely to be edged out of Japanese markets. Tokyo’s regular 38.5% tariff on beef, which applies to the U.S., will fall to 9% for imports from Canada, New Zealand and Australia. Ottawa estimates total beef exports will increase 10% as a result.
The editorial is almost excellent. Why almost? Look at the summary after the title. Also look at the last sentence of the first paragraph that I quoted. Both contain a key error and it’s the same error. What is the error?
HINT: Put aside foreigners, which you shouldn’t. Within the United States, what other group contends for being the biggest losers? Why?
BIGGER HINT: Read this piece that I wrote for Fortune in 2000.
READER COMMENTS
Jon Murphy
Jan 7 2019 at 6:31pm
They’re focusing primarily on the costs of trade, that is exports. No attention is given to the benefits of trade: imports
David Henderson
Jan 7 2019 at 8:02pm
You’re half right. They’ve left out the benefits to consumers.
But when people export, they don’t typically do so at a loss. There are gains from trade. So the Journal has picked up on the gains to producers. Of course, the value of exports is not the gain to producers. The gain to producers is the value of exports minus the cost of exports, that is, producer surplus.
Jon Murphy
Jan 7 2019 at 9:47pm
I did not mean to imply exporters export at a loss. Rather, I meant that exports are what are given up in order to import.
The goal of trade is to import, not export. Thus, measuring trade by export growth rather than import growth means measuring the more you have to give up rather than what you receive.
That’s all I meant
David Henderson
Jan 7 2019 at 11:07pm
I know that’s what you meant and what you meant is wrong.
The goal of trade is to trade.
People who sell exports don’t necessarily buy imports. The whole idea that exports pay for imports is actually quite collectivist.
There’s nothing magic about borders. So imagine someone at Safeway sells you coffee. Safeway’s goal isn’t to get what you produce. It’s to get your money.
Jon Murphy
Jan 7 2019 at 11:14pm
That’s a fair point.
Benjamin Cole
Jan 7 2019 at 8:18pm
In a world where “comparative advantages” are largely artificial creations of the state (export subsidies), this picture become blurry.
Suppose the US applies tariffs on imports.
In a true free-trade world, that would be a negative, a tax, a wedge between consumer and producer.
But in a hyper-competitive world where exports are subsidized (the present reality), a tariff is offset by greater export subsidies by exporters (especially by the Communist Party of China, which has little regard for the price signal).
In the present-day world, when the US applies tariffs, the US Treasury collects money that was formerly collected by exporters—that is, the supply is inelastic, and exporters will provide the same amount of product but accept a lower price.
http://www.econpol.eu/sites/default/files/2018-11/EconPol_Policy_Brief_11_Zoller_Felbermayr_Tariffs.pdf
The above study concludes that due to the inelasticity of supply, China is basically “eating” the Trump tariffs. This is a benefit for American consumers and taxpayers.
I would love a world of free trade among non-authoritarian governments, and where global love rules. Kum-bi-yah!
But we live in a world where comparative advantages are artifices of state policies, and some of those states run dirigiste authoritarian economic regimes.
Trump has figured out how to leverage such a (dark) world to the advantage of US consumers and taxpayers. Warren Buffett too, btw. He advocates importers bid for the tight to import to the US.
Matthias Goergens
Jan 8 2019 at 8:15am
American investors used to subsidies my cab rides—because they let Uber operate at a loss in my market. That might or might not be rational for them, but I am grateful.
If China (allegedly) wants to subsidies the American main street by providing goods cheaper than cost, we should be just as grateful. Even if sending wealth from relatively poor Chinese to affluent average Americans is arguably even less rational than subsidising cab rides in Singapore: it’s their money.
I don’t see how the subsidies that other people provide for use justify extra taxes on transactions, even if they are ‘only’ offsetting.
If you want to raise revenue, pick something more efficient, like taxing unimproved land values.
(And the only other kind of tax that makes sense is a Pigou sin tax. But I don’t see how trading with the Chinese is a sin.)
Benjamin Cole
Jan 9 2019 at 7:49pm
Matthew– due to the inelasticity of supply on imported goods, when the US applies tariffs to imported goods, the price of the goods goes down.
The US collects tariffs, but the price to consumers remains the same.
I cannot think of a less harmful tax to apply in the US, given the current realities.
David Henderson
Jan 10 2019 at 11:10am
You could be right about the inelasticity of supply of imported goods, but, then again, you might not be. What’s your basis?
Hazel Meade
Jan 8 2019 at 12:42pm
Biggest losers:
US industries that must compete with Canadian and Mexican competitors for US consumers. And the workers that work for those industries.
Fred in PA
Jan 8 2019 at 1:29pm
Okay, I guessed wrong about the error in the piece.
However, I still don’t understand why the following isn’t largely correct. (A plea to the readers; I am not an economist — only peripheral to that field — so I may need some enlightenment.)
Suppose the world has an appetite for a certain volume of soybeans. Suppose, in retaliation for Trump’s tarriffs, the Chinese stop buying U.S. soybeans and switch their trade to Brazil. Doesn’t this imply that — at least in the short run — other consumers, who used to be supplied by the Brazilians, must now find a new source of supply? And, voila!, there stand the Americans worriedly looking for new customers for the beans they used to sell to the Chinese!
Don’t we just play a game of squirrels-change-trees?
Admittedly, the process will likely embed some frictions / changes in the transaction costs (if I’m using the terminology correctly). But when the dust settles, aren’t we approximately where we started? (Only the addresses on the bills of lading have changed.)
Jon Murphy
Jan 8 2019 at 1:45pm
Just for the sake of clarity, let’s assume no transaction costs (they’d just muddy the water and not really provide any additional insight into your question). For similar reasons, let’s assume a perfectly competitive market for soybeans (that is, there are so many buyers and sellers that any one actor, such as China, cannot affect world prices).
US soybean producers would not likely be affected that much in this scenario. Other buyers would just come in. It would be Chinese soybean consumers who would feel the pinch since they are now consuming fewer soybeans (indeed, there are some indications that the tariff is prohibitively high, meaning no Chinese consumption of US soybeans, which means they are unambiguously worse off).
So, while there may be some “squirrels-change-trees” for producers in this case, consumers are made worse off.
Warren Platts
Jan 19 2019 at 2:18am
Given the assumptions you make: no transaction/transportation costs, a perfectly fungible product, and a perfectly competitive global market, where China has no effect on world prices, then a Chinese tariff on U.S. soybeans would not affect Chinese consumers. They would simply buy their soybeans from Brazil. Meanwhile, the Europeans who formerly bought their soybeans from Brazil would buy them from the USA instead. It would be a game of musical chairs, or squirrels switching trees, but no one would be made worse off.
The reality of course is that Brazil is closer to Europe than China, and the west coast of the USA is closer to China than Europe. So transportation costs will go up. Moreover, US producers obviously face lower prices: they have basically eaten the entire cost of the tariff, so it is hard to make the case that Chinese consumers are suffering welfare losses as a result of the Chinese tariff on American soybeans.
RPLong
Jan 8 2019 at 2:47pm
Years of reading EconLog are paying off. I read the excerpts and, even before I had gotten to the question asked in your post, started thinking to myself, “Why are they talking so much about producers when consumers are the real losers here?”
Corey Lanum
Jan 8 2019 at 3:02pm
To be fair to the author of the article here, the tariffs that the US placed on goods from these countries was already far lower than what the other countries placed on US goods. So while reducing or eliminating import tariffs would have been good for US consumers, the effect wouldn’t have been as large as the benefit from reducing those other countries import tariffs to US exporters.
David Henderson
Jan 9 2019 at 11:54am
That’s a very good point. It was hard to tell from the column whether the decline in tariffs would have been much bigger for other countries than for the United States. I agree with you that the United States has among the lowest tariffs. Canada’s, though, are even lower. I’m not sure about the other countries, but you’re probably right that theirs are substantially higher than ours.
Joshua
Jan 8 2019 at 3:16pm
“Treat all economic questions from the viewpoint of the consumer, for the interests of the consumer are the interests of the human race.” – some French dude I think. 😉
Comments are closed.