Are US Property Rights Contributing to the Trade Deficit?

The United States has relatively strong property rights protections compared to other nations.  According to the Economic Freedom of the World Index, the US remains in the top quartile when it comes to property rights protection (although the absolute score has fallen in recent years).  Could this ranking be contributing to the US’ global trade deficit, and especially that with China?

When looking at international trade accounts, what is typically reported on is the trade balance or current account.  This is, generally, the amount of goods/services imported and exported between two countries.*  However, there is an opposite side to the coin here that is less discussed: the capital account or the importation/exportation of asset ownership between countries.  Asset ownership includes things like real estate, ownership of firms, etc.  By definition, the current account and the capital account must sum to zero.  In other words, foreigners sell to us in order to buy either US made goods/services or US assets.  If the US has a trade deficit (more imports being sold to US buyers coming in then exports being sold to foreign buyers going out), then the US must necessarily have a capital account surplus (more assets being bought in the US by foreigners then US citizens buying foreign assets).

So, where do property rights play in?  Property has long been a good vehicle for saving as it literally provides shelter and typically has some value.  As with any nation that gets wealthier, the wealthy people in China are looking for safe yet productive ways to invest and save.  Property does not play that role in China.  Much of Chinese property is, at best, leased from the government; it cannot be outright owned.  What can be owned, however, is always at risk from nationalization or appropriation from the Chinese government, especially if one becomes a political target.

In the US, property rights are much more secure.  Except under few conditions, and with compensation, the US government cannot just appropriate property to itself.  Property is easily transferable, either by sale or by inheritance or gift, in the US.  The US has a strong rental market, meaning they can earn rents, and the police generally enforce property rights from burglary and fraud.  In short, property is generally safe in the US.**

If a Chinese person wanted to put money in property as a means of saving, putting money in his own country would not necessarily make sense given their instability when it comes to property rights.  S/he may be more interested in investing in the US.  In order to do this, however, they would need US dollars.  US dollars are acquired by selling goods in the US.  The Chinese person then, instead of using those dollars to buy American-made goods/services, invest in the American economy by buying real estate and turning them into investment properties, an option not easily available to them in China.

Trade deficits are not, prima facie, a reason for worry.  they do not mean that the economy is weak or weakening.  Indeed, just the opposite: in the above discussion, the trade deficits exist precisely because the US economy is strong!

*It’s slightly more complicated than this, but for our purposes here that does not matter.

**Of course, a glaring exception to this is the abomination known as civil asset forfeiture, but even that is restricted in the US and, God willing, on its way out

Today’s Quote of the Day…

…comes from page 236 of Bruno Leoni’s 1961 work Freedom and the Law (3rd Edition, emphasis original):

If we consider it well, there is nothing “rational” in voting that can be compared with rationality in the market.  Of course, voting may be preceeded by argument and bargaining, which may be rational in the same sense as any operation on the market.  But whenever you finally come to vote, you don’t argue or bargain any longer.  You are on another plane.  You accumulate ballots as you would accumulate stones or shells – the implication being that you do not win because you have more reasons than others, but merely because you have more ballots to pile up.  In this operation you have neither partners nor interlocutors but only allies and enemies…The political language reflects quite naturally this aspect of voting: Politicans speak willingly of campaigns to be started, of battles to be won, of enemies to be fought, and so on.  This language does not usually occur in the market.  There is an obvious reason for that While in the market supply and demand are not only compatible but also complementary, in the political field, in which legislation belongs, the choice of winners on the one hand and losers on the other are neither complementary nor even compatible.

JMM: This difference between the market and the political realm is utterly lost on those who advocate for government directing of the market: those who argue for “trade wars” or “minimum wage” or any other government interventions.  Markets are about cooperation, not violence.  When China sells goods to the US, it is not a battle, China is not the enemy.  When Wal-Mart hires workers at a given wage, it is not Wal-Mart exploiting workers or some great battle between labor and management, but rather cooperation between the two.

Political language easily lends itself to conflict and violence.  But to use that same language in the market is to fundamentally misunderstand what the market is.

What is Free Trade?

The following is a letter to the Wall Street Journal:

Edmund Miller argues that Dr Boudreaux misses the point of President Trump’s trade policy, that he is merely just using tariffs to get “free and fair” trade and zero tariffs.  Ignoring the fact President Trump has explicitly denied this is his goal at all (see, for example, his comments here and here), Mr Miller rather misses the point of free trade.

Free trade is nothing more than this: the observed outcomes that occur when people are free to make their own decisions.  Nothing more, nothing less.  By using his authority as the head of the executive branch of the US government to punish certain people for behaving in certain ways, President Trump is explicitly against free trade.  It may be “fair trade” (however we wish to define that), but it cannot be called free trade in the correct sense of the word.

Jon Murphy

Fairfax, VA

PS: see also Don’s response here

Obsolescence: Economic and Technical

The language of economists is often fraught with confusion for a simple reason: we use common words and use them in a precise manner that is different from what many people think.  We inherited a language and our words don’t quite fit into others mouths easily.

One such word is “obsolescence.”  People tend to think of “obsolescence” in a technical sense, that is as something that is old and thus no longer needed.  The horse and buggy was made obsolete by the automobile.

Economists think of the term in a different manner, that is to describe a method of acting that is no longer economically practical given the change in costs/benefits.  This may include adopting a new technology, but it may not.  By way of example, consider the following: why do some people still take the train when we can fly everywhere?  In a technical sense, the airplane has made the passenger train obsolete.  But people still ride the train because the costs of riding are lower than the benefits of riding versus the same calculus of flying.  For some people, the act of flying is obsolete.

Ian Fletcher makes this very mistake in responding to Pierre Lemieux’s new monograph What’s Wrong with Protectionism?  Fletcher writes:

You [Lemieux] attack a protectionist straw man. For example, contrary to what you [Lemieux] say on page 48, reasonable opponents of unilateral free trade do not advocate protecting “obsolete manufacturing.”

Fletcher is confusing technical and economic obsolescence.  Protectionists do indeed advocate protecting obsolete manufacturing; they are obsolete in that they are no longer serving people’s needs since people are now choosing imported products.  If this were not the case, then protectionism would not be needed.  These firms might be at the top of the tech world, but that does not mean they are successfully serving a need.  To protect them is indeed to protect an obsolete industry.

Tariffs Harm Suppliers, Too

Michael Hicks of Ball State points us to an important bit of news regarding the current Administration’s strategy of using tariffs as a billy club:

The landed cost of U.S. beans in China is currently similar to Brazilian soybeans even with the 25-percent tariff, but Chinese crushers are reluctant to take U.S. supply as they fear authorities may not approve cargoes and that tariffs could climb further.

Hicks adds:

Game Theory 101 (prerequisite is Trade 101): Reduce volatility over the long run by trading with more stable and predictable partners. Signaling through ‘crazy’ behavior, with uncertain payoffs is higher risk.

And while the Chinese may be the ones primarily reducing their imports, this can affect other US trading partners as well.  Once solid allies like Canada, Mexico, South Korea, and the EU suddenly find themselves targets of tariff aggression.  If the behavior of your trading partner’s government is erratic, you face increased costs in dealing with them.  Higher costs, ceteris paribus, mean less quantity demanded.  All firms, then, likely face costs of the tariff, not just the immediate industry facing the tariff.

An erratic tariff regime can be seen as akin to political instability.  Economic actors (buyers and sellers) like certainty.  Countries with greater political uncertainty, where things are more governed by arbitrary legislation rather than principled actions, tend to see weaker economic performance and less economic dynamism as these actors have to take into account these increased costs.

Trump’s supporters may hail his behavior as “4-d chess” and “superior negotiating,” but it comes at a real cost.

As Compared to What?

On this Carpe Diem post by Mark Perry, commentator Citizen Buddy writes:

It is my firm belief that Mutual Free Trade is exponentially superior to Unilateral Free Trade.

While Citizen Buddy’s comment may be true, it is wholly irrelevant to the matter at hand.  Rarely is the choice between mutual free trade (he is using it here to state both countries’ governments do not obstruct their citizens’ trading patterns) and unilateral free trade.  The relevant trade-off is between unilateral free trade and scarcityism.  When faced with that trade-off, unilateral free trade will win every time.

Considering the relevant trade-offs prevents us from making a Nirvana Fallacy and keeps us disciplined in our thinking.  Preferences may be one thing, but budget constraints always exist.  We may prefer complete free trade, but in absence of that, unilateral free trade will do.

Whose Tariffs are Reducing Exports?

Business Insider reports that since Donald Trump started a trade war with China, the US trade deficit has increased.  In August, this has been primarily due to falling exports.  BI goes on to say:

The primary reason for the increase in the deficit [in August] was a collapse in exports, especially soybeans, which fell off by $1 billion, a 28% drop from the month prior. China, the largest buyer of US soybeans, imposed tariffs on the American crop and it appears the restrictions are taking a toll.

Placing the blame on Chinese tariffs for falling soybean exports is not entirely correct.

A tax on imports (ie, a tariff) is the same as a tax on exports.  Simply put, by reducing the number of imports into a country, it reduces the amount of currency foreigners can use to buy exports.  By imposing tariffs on Chinese goods, Trump indirectly imposed a tax on US exports to China, reducing the exports himself!

None of this is to say the Chinese tariffs on soybeans didn’t make an already bad situation worse.  But we cannot lay the blame for the decline in exports at the feet of the Chinese.