Friday 2 October 2009

Trade balances

David Farrar notes Kiwi backsliding on free trade. Well, the Kiwi version of backsliding is that we're delaying further tariff reductions rather than imposing new tariffs, but the direction of change is still disappointing. He notes that, since our free trade agreement with China, exports to China have increased by 60%.
Former Green MP Nandor Tanczos asked on the blogs whether imports also grew by 60%, being of the view that increased imports would be a bad thing. Sadly for opponents of free trade deals, the imports from China increased by only 15%. So what a success story for Goff – exports up 60% from China during the worst global recession in 70 years, and imports only up 15%.

Personally I would not regard it as a bad thing if imports had grown more than 15%. You can’t logically be in favour of one way trade and think we should be able to export as much as possible, but restrict what other countries can export. If imports from China are up, this means NZ consumers are getting to buy goods more cheaply, and it also continues to lift more and more Chinese out of poverty. China’s emergence as the world’s manufacturer has done more to reduce the number of global citizens in absolute poverty than 50 years of aid budgets.
We would expect our exports to China to grow more quickly than imports from there with this kind of deal; China's markets were more protected than New Zealand's prior to the change and New Zealand is much smaller than China.

Personally, I would not regard it as a bad thing if imports grew by more than exports. Remember that imports are a good thing and exports are the horrible price we have to pay in order to afford to import. To paraphrase Don Boudreaux, I'd be very very happy if I could, from the Principality of Cramptonia in South Brighton, Christchurch, import much more from my local supermarket without having to export more services to the University of Canterbury. And, indeed, if anyone is willing to dump products on Cramptonia at less than their cost of production, so long as I value the goods, I'm more than happy for them to do so.


  1. Saw the link on Cafe Hayek.

    What if there are barriers to entry? What if there are not many buyers and sellers, but only a few sellers? What if one of the sellers "dumps" goods so as to drive the other sellers out of the market, after which they can then exercise monopoly power?

    In those circumstances, would you still be "more than happy" for those sellers to dump their goods?

  2. Please "dump" as much as you want; you'll soon find out if what you are dumping is valued by consumers or is considered cheap crap. It's the difference between K-Mart and Armani, between Chevy and Porsche, between economy and first class; i.e. subjective value. We "punish" naughty foreigners by imposing trade embargos. Surely doing the same thing to ourselves makes no sense?

  3. He certainly should be. In the meantime, he gets the products he wants at a ridiculous price! When that other seller starts trying to exercise their monopoly, there's nothing to keep other competitors from re-entering the market unless the Big Bad Monopoly lowers their prices again or increases their quality. The consumer wins either way.

    ... Unless Big Bad Monopoly goes through government to get all kinds of draconian regulation enacted to promote "responsibility" that in fact makes it impossibly expensive for new competitors to enter the market.

  4. eidolways-

    If Big Bad Monopoly (BBM) is getting excess profits in a market where there are start up costs, then why would someone else enter the market? BBM has already demonstrated that they will dump to kill any competition. Why would you enter such a market knowing that BBM will react by dumping again until your venture has gone belly up? As such, you won't be able to sell at a profit, and will lose your start up costs on top of that.

  5. Brian Whipple,

    There is more than one way to beat a monopoly. Customers make substitutions. Innovators upstage the monopoly product with a new improved version. Sellers could customize the product to better fit local needs. Any BBM will always have competitors nipping at their heels if the market is indeed lucrative. If not there are plenty of other needs to satisfy.

  6. @Brian: The case you posit can't be general. In any case where the good is durable and homogeneous (steel, for example), the "dumped upon" folks can just build massive inventories by buying the below-cost production, borrowing temporarily in anticipation of excess returns when the dumper runs out of cash.

    So you need perishable goods for a start where competitors' on-selling is very difficult. Moreover, you need big capital market imperfections: otherwise, even in the perishable goods case, the domestic firms shut down temporarily and borrow to cover fixed costs; capital markets know they'll be at an advantage relative to the dumper who's currently burning money and so will be happy to extend credit for the interim.

    So, in short, I can't buy anti-dumping arguments on commodities like steel, which is where they most typically are used to justify tariffs. Moreover, the rather nice 1985 piece by Vernon Smith and Mark Isaac blows up the case for predatory pricing in a lab environment designed to be favourable to predatory pricing: your barriers to entry case (sunk costs).

  7. Thanks for your response. I appreciate it.

    I'm not trying to belabor things, I'm just trying to understand. I'm a fan of the free market, but all of the conditions for it aren't always met. I don't want to sound like a jerk, because I raised an issue that you addressed directly and I appreciate it, but it doesn't seem to me to be as improbable as you represent. I'll mull it over, and read the piece you cite on predatory pricing.


  8. @Brian: no worries. The thing to remember is that most of our conditions for efficiency are sufficient ones rather than necessary: violating them doesn't always mean that inefficiency follows.

    Also check out the IO literature on predatory pricing. There was an interesting piece by Aiginger et al a while back (if memory serves) looking at the differences between American and European IO economists. That the Americans had largely abandoned predatory pricing arguments while the Europeans still went for them I found interesting.

  9. "Personally, I would not regard it as a bad thing if imports grew by more than exports. Remember that imports are a good thing and exports are the horrible price we have to pay in order to afford to import"

    True enough in the short term, but of course when imports grow faster than exports (in other words, when our current account deficit increases), it's not the altruism or stupidity of the rest of the world that makes this so (as in your dumping supermarket example).

    We only find financing for our current account deficit when the rest of the world agrees to buy our currency. Some of that demand for NZ$ is for foreigners to buy little bits of our country, some is in the form of loans to allow ourselves to buy (and bid up the price of) little bits of our country, and only a portion goes towards increasing our productive capacity and ability to pay off the debt incurred.

    Unless you believe that are neither myopic nor irrational, and we always take on debt like this in a perfectly informed manner, you can have reason to worry about "growing imports", since they are the flip side of an increase in debt which is clearly unsustainable and quite possibly also not in the long-term interests of the borrowers.

    It's the recognition of our increasing debt, not mercantilist silliness, that is behind the commonly-expressed worries about growing imports.

  10. @Tim: Why are you requiring such strong assumptions as precondition for thinking that somebody deciding to borrow money abroad to buy a house isn't causing external costs?

    Suppose I go nuts and borrow a pile of foreign cash for an investment in a new company making MudGum -- the chewing gum that tastes like mud! Specify that I'm myopic and irrational and horribly informed. I go bankrupt and the guy I borrowed money from gets whatever's left of the factory. The guy I borrowed money from is worse off, I'm worse off, but I can't see how the guy down the street is worse off.

    The "bid up the price of"...that's a gain to the seller. A pecuniary externality and consequently of no efficiency consequence. Buchanan & Stubblebine 1962 (among others).

  11. I guess banking system failure and a real recession would be the external costs of this type of irrationality occurring on a widespread scale, as in the USA, UK and Ireland (if not in NZ).

    External costs of "bidding the price up", assuming away catastrophic financial-sector scenarios? Perhaps to the extent that households build an unrealistic picture of their wealth position, thereby encouraging higher immediate consumption which is not optimal given their true lifetime income, such asset price bubbles are a bad thing? The effects of a prolonged high exchange rate on the productive capacity of the export sector shouldn't be understated either - we're not so flexible that export production will quickly pick up once the borrowing binge subsides and the exchange rate falls.

    So I'm unable to convince myself that the welfare consequences of widespread irrationality and myopia are necessarily that benign.

    Just to clarify, I was suggesting that the 'increasing imports' that were the original topic of discussion were a symptom of unsustainable (probably irrational?) debt accumulation, and it's the debt accumulation (not the imports per se) that's problematic. So at least some us who hand-wring about increasing imports do so because they function as a 'scoreboard' for the underlying debt accumulation and sale of assets to foreigners that we think is not in the long-term interest of many New Zealanders.

    Current account deficits driven by government budget deficits (eg. Bush-era USA) are even worse, of course, because it can't be argued that they are the consequence of rational individuals taking on debt - they reflect intergenerational transfers, since the public debt will have to be paid by future taxpayers.

    But that's a different matter and I'm probably well off-topic already... thanks for the reply though.

  12. If there is widespread irrationality and myopia, that certainly would not be benign. It may not be meliorable, but it wouldn't be benign. I'm rather unconvinced that it's there though.

    Some of what you're arguing seems to be about Kiwi consumers having too high a rate of time preference. If they do, then the interest rate here has to push up relative to the world rate to draw in investment funds. That pushes up the dollar. Because we have a capital account surplus, fuelled by domestic disinterest in saving, we have to have a current account deficit (accounting identity).

    Now, maybe you're saying it's myopic to have a high rate of time preference. I'm certainly not willing to borrow at 10% to finance current consumption. But I also don't think I'm in a position to judge wrong those who view that price worth paying.

    As for asset sales to foreigners...the only assets that are sold are ones handed over by a willing seller. The seller judges the price to be fair or he wouldn't sell his asset. I can't see why it much matters whether the willing buyer is from Tekapuna or Taiwan. You'll probably argue that a stream of profit payments goes back to Taiwan afterwards, but the asset price will reflect the present discounted value of that very profit stream.

    I'm less worried about the intergenerational aspects of deficits: future people are going to be richer than us, and if we think that redistribution from rich to poor is morally justifiable (38% top marginal rate anyone?), then I can't see a good argument against transferring from future people to us. I'm more worried about deficits because while I'm very reluctant to assume irrationality in individuals' private market decisions, I'm not unhappy about such assumptions in voting models. See Caplan's 2007 book for instance.