Gaining a sophisticated – as opposed to the much more commonplace sophistical – understanding of the principles of international trade is easy. Doing so begins with grasping the first principle explained in last week’s column: Trade isn’t carried out by countries; trade is carried out by people. Trade is carried out by individuals made of flesh and blood, and each acting purposefully to achieve his or her ends. Collectives referred to by plural pronouns (for example, “we” and “them”) and by country names (for example, “United States” and “India”) are not sentient; they do not trade with each other. To keep this truth in mind is to remain inoculated against fundamental misunderstanding.
Keeping this truth in mind reveals that the benefits of international trade arrive in the form of imports. Exports are costs that individuals incur in order to receive imports.
4. The Benefits of Trade are Found in Its Imports. Exports are Trade’s Costs.
That this truth must be spelled out is itself a sad remark on the widespread (mis)understanding of trade. Popular and political discussions of trade almost universally identify imports as costs and exports as benefits. The notion is that receiving imports is the price that we in the home country pay in order to enjoy the benefit of sending out our exports. In trade negotiations, when one government agrees to allow its citizens to import more, that government is said to grant to other governments a trade “concession.”
This notion is worse than false; it’s downright wacky.
Dan Ikenson reminds us that “Milton Friedman liked to point out that exports are things we produce but don’t get to consume, while imports are things we consume without having to produce.” Indeed so. Exports are a cost; imports are a benefit.
To say that exports are a cost is not to say that they’re undesirable. But the desirability of exports is found in the goods and services that they enable us to consume. If exports brought us no imports, they would be all cost and no benefit. Put differently, exports are a means; imports – that is, the goods and services that we receive because of our exports – are the end. That the means in this case are justified by the end does not transform the means into the end.
An easy way to distinguish means from ends, or costs from benefits, is to ask yourself this question: ‘If I must give up one side of a transaction and keep the other side, which side would I give up?’ The side you’d give up is the means – it’s the cost; the side you’d keep is the end – it’s the benefit.
So in the context of international trade, would you (if you live in America) prefer that Americans give up importing while continuing to export, or that Americans give up exporting while continuing to import? The answer should be obvious. If we Americans continue to export without importing, we’ll enrich foreigners as we impoverish ourselves. In contrast, if we continue to import without exporting, we’ll be enriched by goods and services received from foreigners for which we sacrifice nothing.
Experience informs me that some of you are as yet unconvinced. So modify the question modestly: Which of the following options would you prefer? Option 1: You, personally, give to a foreigner some valuable good that you own and in return receive nothing. Option 2: You, personally, receive some valuable good from a foreigner and in return give nothing?
Option 2 is obviously better for you than is option 1. And because all international trade is conducted by persons just like you, the benefit side of each international trading transaction is found in the goods or services that the trader receives in exchange for the goods or services that the trader gives up.
“But,” the rejoinder quickly comes, “when we export without importing we don’t get nothing. We get money. Exports are beneficial because they enrich each supplier of exports with more money!”
Alas, this rejoinder falters when it encounters a fifth principle of international trade —
5. Money Plays the Same Role in International Transactions that it Plays in Domestic Transactions.
You accept payment in money from foreigners for the same reason that you accept payment in money from fellow citizens. That reason is your knowledge that the money you accept can be exchanged for valuable goods, services, or assets.
Suppose you sell your car to a Spaniard for 20,000 euros. Do you accept these euros because you’re enamored with the engravings they feature? Obviously not. You accept these euros only because you’re confident that you can exchange them for goods, services, or assets.
You might spend these euros on a European vacation for you and your family – in which case you really exchanged your car for transportation, hotel stays, meals, souvenirs, and entertainment in Europe. But even if you personally want no goods, services, or assets from Europe, you’ll still accept payment for your car in euros. The reason is that you’re confident that some of your fellow Americans want to buy goods, services, or assets from Europe and so will give to you, in exchange for your euros, 20,000 euros worth of American dollars. You’ll then spend those dollars buying goods, services, or assets priced in dollars.
Either way, you sell your car not for the money but for what the money enables you to buy. It follows that people export, not ultimately for the money earned on those exports, but for what that money can buy.
For those of you who remain skeptical, ask yourself if you’d accept, as payment for your car, Monopoly money. If you answer “no,” you thereby verify my point.
(And to repeat a truth that bears repetition, foreigners are just like you: they accept money for their exports only because they wish to spend that money on goods, services, or assets.)
6. The Greater the Amount of Imports We Receive for a Given Amount of Exports, the Better Off We Are – and So Foreigners Who Arrange for Our Imports to Rise Relative to Our Exports Do Not Treat Us “Unfairly.”
This sixth principle of international trade is really a corollary of the above-listed principle #4. Because imports are benefits achieved by incurring the costs of sacrificing what we export, the more we import relative to the amount that we export, the better off we are.
Here’s another question for you trade skeptics: Are you better off or worse off if the amount of real goods and services you acquire in exchange for a given amount of your work effort rises? If you answer “better off,” you again verify my point.
The conclusion is indisputable: foreigners do not treat us “unfairly” if they insist on sending to us more imports in exchange for a given amount of our exports (or, what is the same thing, if they accept fewer of our exports in exchange for a given amount of what we import from them).
This reality, however, doesn’t prevent pundits and politicians from screaming accusations of “Unfair trade!” whenever they believe that foreigners are arranging to increase the amounts that we import relative to the amounts that we export.
But such accusations are ludicrous. If foreigners successfully arrange any such outcome, we in the home country should send them thank-you notes for the gifts they bestow on us. Accusing foreigners in such a case of treating us unfairly makes no more sense than accusing your employer who gives you a raise of treating you unfairly.
Until and unless someone who receives a raise would so accuse his or her employer of unfairness, that someone has no business hurling accusations of unfairness at foreigners who give us a raise by increasing the amounts that we import relative to the amounts that we export.
Read Twelve Principles of International Trade: Part 3