In despair that his dream of democracy in South America had failed, the dying statesman Simon Bolivar said, “We have plowed the sea,” meaning that, looking back, he could see no accomplishment for his struggles. The same frustration hits economists who, looking back over years of teaching trade issues, see that the same fallacies dominate popular thinking as they have for centuries.
A most persistent and deeply embedded fallacy is that of “mercantilism,” which holds that exports are good and should be promoted while imports are bad and should be limited. Adam Smith and David Ricardo convinced other economists two centuries ago how this was wrong, but their insights have not trickled through to the public.
The mercantilist view is that imports are a necessary evil. We should import only if we cannot make it here.
States encourage this view when they tout their exports but ignore imports, which are equally vital to a state’s economy, though we pretend they are not.
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On both the state and national levels, one problem is identifying what exactly constitutes an import.
Consider China’s trade data. It shows large exports from that nation into the United States. But these are of finished goods. What we tend to ignore is China’s large imports from poorer Asian nations like Bangladesh and Vietnam. Across a wide range of products, from clothing to consumer electronics, much of the production of goods we think of as “Chinese” actually takes place elsewhere, but we focus on the bilateral data for our nation with China.
The trade data system of the U.S. Department of Commerce is designed around trade in manufactured goods. But it is very weak for primary products, especially agricultural ones. Ag products are subject to the same blurred origin problems as manufactured goods.
These concerns arose anew last month in my home state of Minnesota, where U.S. Steel announced it was laying off more than 1,000 iron workers at two plants on the Iron Range.
These job losses, generally and correctly, are being blamed on a slowing global economy, especially in Asia, and lower exports of American iron. But “unfair” or even “illegal” imports of finished steel from China also receive much blame. If we didn’t import steel, the thinking goes, U.S. mills would sell more and would demand more U.S.-mined ore.
This cuts to the core of why mercantilist views are so strong.
It is a variation of economist Mancur Olson’s “logic of collective action.” Olson argued that when a small group of people, each of whom having a great deal at stake in some issue, goes up against the interests of a very large group, each member having only a small stake, the small group will win out politically — even if the small group’s gains will be insufficient to offset the losses that will hit members of the larger group.
Iron mining and steel interests are small, well-defined groups, both in terms of the companies involved and the workers employed. Nearly every household uses steel, but we don’t buy steel. We buy washers and dryers, cars, rebar in the concrete driveway.
And we collectively buy steel, through taxes, in reconstructed roads and bridges. The losses to society from the higher prices caused by import restriction far outweigh the benefits to ore and steel companies and workers. But one group is organized, very vocal and visible through job losses, while the other is largely unaware and comprising passive consumers.
China grows soybeans but also imports them from the U.S. Are U.S. soybeans, sold at world market price, unfairly penalizing Chinese farmers? Is Grade 60 rebar, also sold at prevailing world prices, unjustly and illegally hurting Minnesota miners and Indiana steel workers? Economists would say not, but many in the general public see things differently. (Predatory “dumping” at prices below the marginal cost of production are a theoretical exception to beneficial trade, one quickly alleged by steel interests, but almost never borne out by the evidence.)