Tag: trade

Chinese Drywall Maker Held Accountable without Congressional Meddling

This summer, the House Energy and Commerce Committee approved a bill that would require foreign companies that import goods to the United States to appoint a legal representative in the United States who could be sued if their products caused injury. Exhibit A in the push for the bill was the case of contaminated drywall from China.

Advocates of the bill, titled the “Foreign Manufacturers Legal Accountability Act,” say it is necessary to ensure compensation for American consumers injured by faulty foreign-made products. Without a designated domestic agent, foreign companies could escape liability by dodging efforts to serve them with papers in a lawsuit. Hearings earlier this year highlighted the case of the drywall, in which damaged homeowners were finding it difficult to sue the Chinese producer.

The trouble with this approach, as my colleague Sallie James and I pointed out in a recent Cato Free Trade Bulletin, is that it would impose an additional burden on importers without adding significantly to the ability of consumers to gain compensation. We argued that sufficient remedies exist without adding a new law that looks suspiciously like a non-tariff trade barrier designed to protect U.S. manufacturers from foreign competitors.

As Exhibit A on our side, it was announced this week that a group of affected homeowners has struck a deal with the Chinese drywall company for compensation. As The Wall Street Journal reported in today’s edition:

Knauf Plasterboard Tianjin, along with suppliers and insurers, agreed to remove and replace the company’s drywall, as well as all the electrical wiring, gas tubing and appliances from 300 homes in four states.

They also agreed to pay relocation expenses while the houses, in Alabama, Mississippi, Louisiana and Florida, are repaired. The cost of fixing the houses, expected to take several months, is estimated from $40 to $80 per square foot per home. At $60 per square foot for a 2,500 square-foot home, the cost would be about $150,000.

Although the settlement involves a fraction of the homeowners who have file claims over the past few years, it is seen as a possible model for the resolution of other pending state and federal lawsuits …

The deal for compensation shows that the existing system works reasonably well for foreign-made as well as domestic-made goods. Congress should give up its efforts to place needless obstacles in the way of imports in the name of solving a problem that does not exist.

Is the Trade Gap to Blame for Slowing GDP Growth?

What had been a recurring story line buried in the business pages has now burst onto the front page: “Economic growth slowed by trade gap,” the Washington Post reports this morning in an above-the-fold headline.

The lead sets the stage for a story long on generalizations: “A widening U.S. trade deficit has become a substantial drag on economic growth as the country’s exports struggle to keep pace with the swelling sums that Americans are again spending on imported goods.”

The half truth in the story line is that exports fell by $2 billion in June compared to the month before, and that this has a negative effect on overall GDP growth. In our more globalized world, the rising wealth of our trading partners translates into more production in our own economy, and vice versa.

The fatal flaw of the story line (as I tackled recently here and at greater length here) is that it assumes that rising imports slow economic growth. That assumption, in turn, rests on a simplistic Keynesian view that if a portion of domestic demand is satisfied by spending on imports, that means less demand for domestically produced goods, thus less output and lower employment.

That view neglects the supply-side role of imports. More than half of what we import consists of goods consumed by producers—capital machinery, raw materials, parts and other intermediate inputs. Those imports help us produce more, not less. The Keynesian view also confuses cause and effect: Imports usually grow in response to RISING domestic demand. Consumers more eager to spend “swelling sums” on imports typically buy more domestically produced goods as well.

The bean counters at the Commerce Department “subtract” imports from GDP, not because those imports are a drag on growth, but to avoid double counting. If we want to count the number of widgets and other goods added to the economy in a quarter, we would obviously not count those that have been imported. But this does not mean the economy would have been that much larger if the widgets had not been imported.

The Post story adds to the misunderstanding by claiming: “At a basic level, trade deficits represent a loss of wealth for a country—money flowing abroad for goods and services produced elsewhere, supporting businesses and workers in other countries.”

This betrays a basic misunderstanding of wealth that Adam Smith exposed two centuries ago in The Wealth of Nations. Does wealth consist of money—pieces of green paper or blips on a computer or, in Smith’s day, bars of gold—or does it consist of the actual stuff that people produce to make their lives better, all those goods and services that we consume each year? Smith argued it was the latter. And in that case, a trade deficit at a basic level represents an inflow of wealth from the rest of the world—a cornucopia of cool stuff arriving everyday at our ports and stocking the shelves of our stores.

Of course, even if you think that dollars are the ultimate measure of wealth, obsession with the trade deficit ignores the fact that those dollars spent on imports quickly return to the United States. If they are not used to buy our goods and services, they are buying our assets—real estate, stocks, Treasury bonds, and so on. The “loss of wealth” supposedly represented by the trade deficit is almost exactly offset every year by a “gain of wealth” represented by the net inflow of dollars in the form of capital investment from the rest of the world.

Besides being wrong in its basic economics, making the trade deficit the scapegoat for slow growth poses a double danger for economic policy:

Danger no. 1 is that it tempts politicians to reach for the snake oil of protectionism to create jobs. If only we could stop the flood of imported goods, Americans would make more of those same goods themselves, creating millions of jobs. In reality, higher trade barriers impose a host of offsetting costs on the economy, resulting in lower output.

Danger no. 2 of blaming the trade deficit is that it diverts attention from policies that are far more plausible culprits in dampening growth. Politicians find it much easier to blame imported consumer goods from China for slower GDP growth than huge looming tax increases, expensive new health care mandates, a depressed housing sector, and a generally anti-business climate in Washington.

The trade gap should be the least of our worries.

Imports Viewed Skeptically at the Washington Post

What explains the chronically misleading depictions and interpretations of international trade in the Washington Post?  Is it economic illiteracy? Intellectual indifference? Institutional bias? What?

The opening paragraph in Neil Irwin’s story (online, July 30, 2010, 9:13 am) reads:

The pace of economic growth slowed this spring, according to new government data, as Americans remained reluctant to consume and imports soared.

And a few paragraphs later:

The biggest drain on growth was imports, which rose 28.8 percent, compared with only a 10.3 percent gain in exports.

On July 14, one day after the Commerce Department’s monthly trade figures were released, revealing a slight increase in the trade deficit, the opening paragraph in the Washington Post story under the heading “Rising Imports Offset Export Gains” read:

America’s resurgent appetite for imports may undermine the Obama administration’s efforts to rekindle job growth, with a rise in overseas purchases by American businesses and households undercutting the benefits of increased U.S. sales abroad.

I have posted about this problem again and again and again and again and again (just this year), but apparently to no avail. The simplistic scoreboard interpretation of trade (where exports are considered “our” team’s points and imports “their” team’s) combined with a zeal for inciting fears about economic collapse seems to remain the formula of choice at the WaPo.

As I wrote yesterday:

U.S. producers account for over half of the value of U.S. imports, which means there is great potential to increase their competitiveness by improving their access to imports.  It also explains the strong correlation between imports and exports, between imports and GDP, and between imports and job growth — facts that too many politicians wish to expunge from the record. 

Along with politicians at the end of the last sentence, I should have included a certain newspaper.

Oil Import Make Believe

A conversation with documentarian Robert Stone regarding Earth Day is featured today in The New York Times’s “Dot Earth” online column.  In the course of his conversation with the Times’s Andrew Revkin, Mr. Stone – who is quite alarmed about our reliance on foreign oil – asks:  “How many Americans know that we send about $800 billion to the Middle East every year for oil?”

Hopefully, not many. According to the U.S. Department of Commerce, the U.S. spent $95.4 billion on crude oil imports from OPEC sources in 2009.  But not all OPEC members are from the Middle East.  That $95.4 billion includes dollars spent on oil originating from Algeria ($6.3 billion), Angola ($9 billion), Ecuador ($3.4 billion), Nigeria ($17.7 billion), and Venezuela ($23.4 billion) – none of which are in the Middle East.  Subtract out that oil and we arrive at $35.6 billion spent on Middle Eastern crude oil (a figure rounded from the original nominal counts.  I have used the customs value – that is, the estimated value – of the oil being imported rather than the figures that include additional costs for insurance and transportation because money being spent on insurance and shipping goes to third parties that are not for the most part located in the Middle East.  But if one wants to use those slightly higher figures, it won’t change the numbers very much at all).

For what it’s worth, the total amount of dollars Americans sent abroad for crude oil from all sources was $188.5 billion last year.

Even if the figure were $800 billion, so what?  No one is forcing refineries to buy crude oil from foreign suppliers.  They presumably believe that the oil at issue is more valuable than the money that must be offered to secure said oil and that oil from other sources is more expensive than oil from the Middle East. Hence, they buy. This is by definition a wealth creating transaction for American business enterprises. Foreign trade, Mr. Stone, is a good thing.

The implicit claim, of course, is that there are negative externalities associated with foreign oil consumption. This, however, is faith masquerading as fact (an argument also well made by Cato adjunct scholar Richard Gordon).

Regardless, Mr. Stone overstates the alleged problem by orders of magnitude.

19 U.S. States Sold $1 Billion or More in China in 2009

The U.S.-China Business Council has performed a valuable public service by marshalling state-by-state figures on exports to China. In its annual survey, released this morning, the USCBC documents that 19 states exported $1 billion or more in 2009 to China, which is now the third largest market for U.S. exports.

In a statement accompanying the report, the USCBC noted that exports to China declined only slightly in 2009, compared to a 20 percent plunge in exports to the rest of the world. Top U.S. exports to China last year were computers and electronics, agricultural products, chemicals, and transportation equipment.

The USCBC figures tend to undercut complaints that China’s currency policies have stymied U.S. exports to that country. In fact, as I argued in an op-ed in the Los Angeles Times last week, since 2005, U.S. exports to China have been growing three times faster than our exports to the rest of the world.

There is agreement across the spectrum that the Chinese government should continue to move toward a more flexible, market-priced currency. But the export numbers do not give any support to the critics who want to threaten sanctions against China. In fact, as I concluded in my op-ed:

If the Obama administration hopes to double U.S. exports in the next five years, as the president announced in his State of the Union address, it should praise China for its growing appetite for U.S. goods and services, not threaten it with trade sanctions. Any company hoping to double its sales in the next five years would be foolish to pick a needless fight with one of its best customers.

Thursday Links

  • Now that the health care bill is law, you should know exactly how it’s going to affect you, your premiums, and your coverage over the next few years. Here’s a helpful breakdown.
  • As the health care overhaul crosses home plate, global warming legislation steps up to bat.
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