Damning Trade with Faint Praise

A Washington Post editorial today pushes back against the argument that a Trans-Pacific Partnership agreement would exacerbate income inequality. Amen, I suppose. But in making its case, the editorial burns the village to save it by conceding as fact certain destructive myths that undergird broad skepticism about trade and unify its opponents.

“All else being equal,” the editorial reads, “firms move where labor is cheapest.”  Presumably, by “all else being equal,” the editorial board means: if the quality of the factors of production were the same; if skill sets were identical; if workers were endowed with the same capital; if all production locations had equal access to ports and rail; if the proximity of large markets and other nodes in the supply chain were the same; if institutions supporting the rule of law were comparably rigorous or lax; if the risks of asset expropriation were the same; if regulations and taxes were identical; and so on, the final determinant in the production location decision would be the cost of labor. Fair enough. That untestable premise may be correct.

But back in reality, none of those conditions is equal. And what do we see? We see investment flowing (sometimes in the form of “firms mov[ing],” but more often in the form of firms supplementing domestic activities) to rich countries, not poor. In this recent study, I reported statistics from the Bureau of Economic Analysis revealing that:

Nearly three quarters of the $5.2 trillion stock of U.S.-owned direct investment abroad is concentrated in Europe, Canada, Japan, Australia, and Singapore. Contrary to persistent rumors, only 1.3 percent of the value of U.S.-outward FDI [foreign direct investment] was in China at the end of 2011.

Meanwhile, the United States (not China or Mexico) is the world’s #1 destination for FDI:

With a stock valued at $3.9 trillion, the United States is the top single-country destination for the world’s FDI outflows. There are plenty of reasons for that being the case, including the facts that the United States is the world’s largest market and has a sound legal system and a relatively transparent business environment. More than $4 out of every $5 of that stock (84.2%) is owned by Europeans, Canadians, and Japanese, with the U.S. manufacturing sector accounting for a full third of its value, making it the primary destination for inward FDI.

Are BASF, Michelin, BMW, Siemens, Airbus, InBev, Honda, Kia, Ikea, Shuanghui (recent Chinese purchaser of Smithfield Hams) and thousands of other foreign-headquartered companies invested here because labor is cheapest in the United States? They are here because firms conduct value-added activities wherever it makes the most sense to do so, given all of the considerations and restrictions that affect costs. For so many reasons, the United States is still the top destination for investment in manufacturing and most services industries. 

So stop. Just stop.

The editorial also indulges the most persistent myth of all, that increasing exports while minimizing imports is the purpose of trade agreements. As I’ve written on countless occasions in numerous different ways, increased imports are the real benefits of trade. Our exports are what we use to pay for our imports. If you prefer paying less for your products at the grocery store, you should prefer exporting less for the products you import. And for those concerned about income inequality—the editorial’s presumed audience—it is worth understanding that import competition increases choices and reduces prices, which means imports increase real incomes. 

The editorial concedes that imports from Vietnam may increase under the TPP (“suppose [the bilateral deficit] were to double”), but that the deficit “would still be tiny relative to the overall U.S. trade balance.” Instead of apologizing and rationalizing, as though this development were a cost, why not point out how lower-income Americans, in particular, would experience a lower cost of living because trade would reduce the cost of their clothing and footwear?

We need to do better a job explaining how trade does not lend itself to sports metaphors. Exports are not our “points.” Imports are not “their” points. The trade account is not a scoreboard. It is not Team America against the world. Trade is about mutually beneficial exchange between individuals in different political jurisdictions, and to the extent that those kinds of transactions are subject to the whims of politicians, more and more resources will be diverted from economic to political ends.

Though it may have had good intentions, the Washington Post should know better than to perpetuate simplistic myths spun by well-compensated K Street consultants on behalf of the business, labor, and environmental interests that benefit financially from restrictions on trade and investment.