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A Deficient Understanding

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Tags Global EconomyInterventionismMonetary Theory

06/26/2012Gregory Cummings

Alan Uke, author of Buying America Back: A Real-Deal Blueprint for Restoring American Prosperity, has published an article at the Huffington Post entitled "The High Cost of Cheap Imports." Here he claims that the current economic crisis in America is due to its balance of payments.

Our current economic crisis is not the fault of international trade but of the fact that much of it is dangerously imbalanced. For every dollar Americans spend on Chinese goods, only $0.25 is returned. It doesn't take a math wiz to figure out that eventually we're going to be pretty short on cash. These kinds of trading partners cause the bulk of our massive trade deficit.

According to Uke and other anti-trade-deficit protectionists, the economic crisis could be fixed by eliminating the trade deficit. In theory, this could be accomplished in one of two ways: either by increasing exports or decreasing imports. Increasing exports would benefit exporting industries. Decreasing imports, through tariffs or quotas, would benefit domestic competitors of foreign-imported goods. In either case, profits and wages of the affected domestic industries would likely rise. Because of this, it is concluded that trade deficits are economically harmful. State protection in the form of badges and guns is deemed necessary in order to prevent a trade deficit and provide a net benefit to the country.

In the article, Uke proposes a combination of increasing exports and decreasing imports:

The United States built its early success on industrial excellence, but we've let that advantage slip. After the end of World War II, our manufacturing sector was the only one not in shambles. Other countries made it a national movement to lift themselves out of poverty by making things at home and purchasing their own goods. With our prosperous economy and strong manufacturing sector, we took America's prosperity for granted while these other nations plundered it. Things are now so bad that we now need our own national movement — to make things at home and only buy from countries who buy from us.…

We need to support each other with targeted purchasing choices. We don't need to only buy American (though it helps); we need to buy for America. That means preferring goods from countries we have balanced trade relationships with. Instead of Chinese goods (until they buy more from us), we should buy from other low-cost countries. The price point will likely be similar, but the effect will be hugely more beneficial to our job market because of the trade ratio we have with these countries. As mentioned earlier, with every purchase we make of Chinese goods, 75-percent more money flows out of the country than comes back from them. But of every dollar spent on Taiwanese goods, only 27 percent is not returned, and that figure is 22 percent for Korean goods. The difference is astounding, and this multiplier effect has a concrete impact on our economy and our domestic jobs.

The Problem with "Buy American" or "Buy Canadian"

The division of labor allows individuals in a market economy to specialize in the production of goods and services for which they have a comparative advantage over others. This is why farmers in Saskatchewan grow wheat and fishermen in Nova Scotia trap lobsters.

The law of comparative advantage states that a country will profit by specializing in the production of goods in which it has a comparative advantage and trading for goods in which it does not have a comparative advantage. While this is painfully obvious in the case of the Canadian farmer exchanging his wheat for lobster from his compatriot fisherman, it holds no less true across invisible national borders. Free trade between countries increases wealth and prosperity by more effectively utilizing a country's resources.

The problem with "buy-local" campaigns is that they reduce efficiency by restricting the size of the market and the extent of the division of labor. This results in less specialization and wasted resources. As Gary North explains,

Adam Smith, in the opening pages of Wealth of Nations, presents his now famous argument that the division of labor is limited by the size of the market. Reduce the size of the market, and you reduce the extent of the division of labor. The cry for protection should be seen for what it is: a cry for a reduction in efficiency.

When it comes to reducing imports through buying locally, Uke is effectively saying that America can solve its economic problems in part by reducing efficiency and wasting resources. I, for one, am skeptical.

"Show Me the Money"

As Uke mentions in his introduction, a trade deficit implies that more currency is exiting America in exchange for imported goods than is entering America in exchange for exported goods. Using the author's example of international trade with China, for every $1 paid for imported goods, only 25¢ is returned in exchange for exports. The existing trade deficit creates two possibilities: either the money remains in China, or it returns to America in the form of capital inflows.

If the Chinese simply hoard US dollars, American citizens profit immensely from the exchange. On the one hand they receive affordable goods and services that required valuable resources to produce. In addition, the currency outflow reduces the amount of money in circulation in America, which benefits consumers by reducing prices within the country. This helps to offset the effect of inflation and improves the domestic standard of living.

In the second situation, the currency outflow is offset by a capital inflow as Chinese interests use US dollars to purchase American investments. Mark Brandly, adjunct scholar of the Ludwig von Mises Institute, explains why foreign investment is beneficial:

Foreign interests increase capital formation, they buy bonds and stocks, they build businesses, they create jobs and drive up wages, and they put their money in banks, reducing interest rates.

A country that attracts foreign investment, in other words a country with a healthy economy, will tend to have a net capital inflow and this will be associated with a trade deficit. There is every reason to see the benefits of such a situation. Both the acquisition of imports and the foreign investment are good for the country.


In his article, Uke offers two nanny-state interventionist proposals aimed at eliminating the trade deficit by restricting trade:

"Made in the U.S.A." products still exist, and even more companies would have incentive to move operations back if consumers began to reward these companies with their purchases. A consumer movement aimed at buying American goods, or goods from balanced trade partners, could save our economy. But to do this, we need more accurate information about where things actually come from. We need a detailed country-of-origin label that tells us where products come from, in what percentages, and whether the U.S. has imbalanced trade ratios with those producing countries.

If you own an iPhone, it likely has the words "Made in China" somewhere on the product. But the iPhone is only put together in China. The majority of its components are made elsewhere: in Japan, Taiwan, Korea, Germany, and even the U.S.A. This kind of misinformation is why we need more accurate labeling.…

The American Revolution was also about economic independence from a foreign power. Remember the Boston Tea Party? If everyone were to focus their attention on buying American products and avoiding imports from countries who shun our exports, we could make a real dent in this country's economic problems. And that's why I am calling on Congress to pass a resolution to make July 1 to 7 "Buy American Week." Americans need to know that the power to bring our country back is firmly in their hands.

Once again, a trade deficit is not a justification for restricting trade with other countries. The forced restriction of trade using badges and guns destroys wealth and wastes scarce resources. It is the economic equivalent of cutting off your nose to spite your face. It also reduces the freedom of choice of consumers. It prohibits voluntary exchange and is anathema to liberty. It is also completely unnecessary.

Many arguments support the idea that trade equilibrates on an unhampered free market. These include the price-rate effect, income effect, and exchange-rate effect. According to the price-rate effect, as imported goods are exchanged for currency, the resulting decrease in the money supply will cause domestic prices to fall. Lower prices result in fewer imports and currency outflows, and the resulting increase in the money supply will cause domestic prices to rise, thereby repeating the process. All the while the converse occurs in the foreign country. An equilibrium of trade is the result. No state intervention in the form of trade restriction is required.

Alan Uke is advocating for restrictions on the freedom to engage in voluntary exchange. He identifies an unhampered market as the source of America's economic ills and proposes more big government as the solution. He insists that less choice increases prosperity. He is wrong.

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