The Misplaced Animosity toward Imports

The mercantilist
inclination by the Trump Administration makes
it seem as if exports are good and create jobs and imports are bad and cost
  This is simply not
true.  This assessment is not based
on newfangled thinking about trade
Rather Adam Smith argued against such a view in his 1776 bestseller, An Inquiry into the Nature and Causes of the Wealth of Nations.  

Signals by top officials suggest that the
White House still has reservations
about the border adjustment, a central
piece of the bill sponsored by the House
Republicans.  If the tax changes create
a higher deficit in a decade, 60 votes in the Senate are needed not a simple
majority.  The Republicans hold 52 seats in the Senate, and already a
couple of Republican Senators have indicated they cannot support the

The border adjustment was to raise more than
$1 trillion, which would have funded part of the tax cuts that the White House
Without, another source of revenue will have to be sought or the
tax cuts scaled back considerably.    Treasury Secretary Mnuchin
has also hinted that its assessment of the impact of the tax changes will
likely be more optimistic than others because of the dynamic calculation, i.e.,., that the tax cuts will increase activity
and boost revenue.  

One fall-back option that is being considered is a “reciprocal
tax” to ensure imports are treated the same way as US exports.
The details are not clear, and if not done properly, would likely run contrary
to the WTO.   However, according to a report in the Financial Times,
Trump Administration officials are looking for alternatives to the dispute
resolution mechanism at the WTO.  “Their goal, people briefed on the
request told the Financial Times, is to find ways that the new administration
could circumvent the WTO’s dispute system.”

Whether it is through the border adjustment, a
reciprocal tax, or other mechanisms, at the heart of the drive is to reduce the
US trade deficit. 
This sounds
like a noble goal, but it is considerably more complicated that exports are
good and imports are bad.  Anne Krueger, former chief economist and Deputy
Managing Director at the IMF, now a professor at John Hopkins and Stanford, has
an interesting note on Project

Krueger argues that imports have been maligned.  Imports create jobs. 
She begins off with the obvious; jobs related to shipping, like longshoremen
unloading cargo, pilots, truckers and their crews.  There are wholesale
and retail workers stocking and selling the imported goods.   
Also, she reminds us that half cost of a retail consumer good is incurred locally
for storing, shipping and marketing.  Consider too that the demand for
foreign cars, for example, would be considerably weaker if the parts and
mechanics were not accessible. 

Imports also can provide cheaper inputs than
available locally.
  That enables US companies to compete more
vigorously with foreign firms in third markets, as well as to maintain market
share domestically.  Foreign firms that export to the US earns an income that
can be used to purchase goods from US firms.  Krueger argues that exports generated by imports create better jobs

Krueger warns that limiting US imports would
likely spur many trading partners to curb their imports. 
earnings, she argues, finance imports for most of the world.  If US
imports fall so will US exports.  Export sector jobs would likely fall, alongside jobs created by imports.  

The same arguments that seek to correct the
demonization of imports also apply to foreign direct investment (FDI), which
creates the international supply chains that at least some in the Trump
Administration want to unwind.
  Krueger argues that FDI allows US
firms to secure inputs at lower costs
while engaging in higher-valued added tasks like R&D.  Direct
investment may help save jobs in the US if the choice is between unskilled offshoring work and going out of

Trade is
unjustly blamed
for the loss of manufacturing jobs in the US. 
Manufacturing employment, though not output,
peaked in the late 1970s before free-trade agreements and China’s entry into
the WTO (late 2001).  We have noted that some of this are definitional, and a result of manufacturing
companies outsourcing some services.  However, if there is an agreement
among economists, it is that the decline
in manufacturing employment (not just in the US) is a result of improved
productivity and the use of machines, computers, and robots.  Many
emerging market economies, including China, have lost manufacturing jobs. 


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