TCS Daily

Jim Glassman interviews Brink Lindsey

By James K. Glassman - June 19, 2000 12:00 AM

What's so bad about imports? Media observers tend to get very upset about America's trade deficit, but Brink Lindsey, who directs the Cato Institute`s Center for Trade Policy Studies, says that more trade, even trade with deficits, is good for Americans.

Jim Glassman: Brink, politicians generally refer to trade deals as disastrous if we import a lot from a given country but don't export much to them. Are we underrating the value of imports?

Brink Lindsey: Absolutely. The real benefits to us as a nation from international trade are imports. Exports are the stuff that we have to go through all the trouble of making and then ship off for foreigners to enjoy. Imports are the stuff that other people go through the trouble of making that they then send over here. The only purpose of shipping exports abroad is that they enable us to afford imports. And the benefits are in the transactions -- we are able to acquire things, products and services from abroad that are either better or cheaper than we can make ourselves. So, free trade is all about the benefits of specialization and those benefits mean that we can concentrate on the things we do best and trade those for the things that the rest of the world does best.

Glassman: But isn't it amazing that so many politicians seem to be so concerned about the trade deficit, which means basically that we're importing goods more than we are exporting? Are you at all concerned about that?

Lindsey: No. It is especially amazing since the case for worrying about the trade deficits was exploded by Adams Smith some 220 years ago and keeps getting exploded time after time after time. And yet the bogeyman keeps reappearing and people keep being afraid of it. Right now, we've been running a sizable trade deficit. The trade deficit has increased during the 1990s, during the period of glittering economic performance. Japan is running a nice fat trade surplus and is wallowing in stagnation. So the idea that the balance of trade is any kind of indicator of economic health is just patently absurd from the facts.

The fact is that our trade deficit is not a cause of economic weakness; it's an effect of our economic strength. Because we're growing so fast, we stock up a lot of imports from around the world and because our investment climate is so favorable, we stock up a lot of dollars from around the world. So, these days our trade deficit is a badge of honor, not a sign of weakness.

Glassman: So, it's not a political imperative that we somehow eliminate the trade deficit? If we did, do you think that would be bad?

Lindsey: Well, the best single way to eliminate or at least reduce the trade deficit is to plunge the economy into a recession. The last time we ran a current account surplus was back in the mid-70s during the depths of a recession. And the most recent low in the trade deficit was during the 1991-1992 recession. So, if we slow down our economy and go into negative growth, then we'll stop buying imports and then money will stop flowing in here as investment prospects diminish and we can have a more favorable balance of trade. Of course, that won't do anybody any good.

Glassman: I guess there are really two sides to this. One is that we wouldn't import as much because we would not be as rich but also could it not be a problem for us if other countries shut their doors to our exports?

Lindsey: Well, we are certainly injured when other countries pursue protectionist policies, but the chief victims of those protectionist policies abroad are the citizens of those other countries. They are the people that really take it on the chin. But we do suffer indirect harm. However, trade barriers are not a significant cause of our trade deficit. If we save less than we invest, then that means that we have to import capital and a capital surplus as it were, is the flip side of a deficit. The two are accounting identities. So, the fact that we are investing more in this country right now than we are saving -- that requires importing capital from abroad, which means that foreigners are using the dollars they earn on their exports to buy U.S. assets rather than buy U.S. goods at least at the margin.

Now, we could eliminate the savings and investment gap two ways. One, we can reduce investment or two, we can increase savings. Now, there are certainly attractions to increasing the American savings rate and I think things like Social Security privatization would be a great step towards increasing American savings. But given the savings rate, the trade deficit simply indicates that our investment climate is favorable and the rest of the world is willing to fund the shortfall.

Glassman: Let's just talk about exports and other people's markets, though. What is wrong with using access to our market as a way for getting leverage to open other peoples' markets that remain closed to us?

Lindsey: I would say that the main thing wrong with it is that it doesn't work very well. If you look around the world and look at the real breath-taking gains in market opening that have occurred over the past couple of decades --and they are indeed breath-taking -- the world has made enormous strides towards economic integration over the past twenty years or so. And if you look at what has caused this trend, it has not been tit-for-tat negotiations under the GATT or WTO, at least not primarily. And it certainly hasn't been caused by brow-beating other countries into opening their markets, or else.

The main cause of liberalization around the world has been unilateral decisions by governments abroad to open their markets regardless of what other countries are doing. Governments did this because they recognized that the self-imposed isolation from the world economy that they had been pursuing for decades, either as communist countries or import substitution developing countries -- they realized that this model was not working, that self-imposed isolation was simply breeding poverty and stagnation. They looked to the example of the relatively liberal trading order of the Western countries and they said, "We want to get in on that kind of prosperity" and so they joined the club. That tells me that the main way in which we encourage countries abroad to open their markets is through the power of example. By making as if imports are harmful and threatening to close our markets, I think we merely undercut the power of our example and give aid and comfort to protectionist policymakers abroad.

So, in theory it's possible to open markets with the crow bar of Section 301 and similar kinds of mechanisms. And it does work now and again in particular narrow segments. But in the big picture, it is practicing what we preach that gets other countries converted to the free trade cause.

Glassman: Now, when you talk about these other countries, is China an example of what you're talking about?

Lindsey: Yeah, absolutely. China before 1978 was completely isolated from the outside world. It changed that course dramatically under Deng Xiaopeng, opened up and began exporting. But you can't export unless you import. So they found out that because you can't make it, because to specialize in particular products, you're going to have to import capital equipment, import particular components and so exporters become a powerful pro-import lobby because they need raw materials and inputs from the rest of the world. So, China even if it has been pursuing a mercantilist trade policy with a lot of protectionism is much more open to foreign goods and to foreign investments than it was before. And so, it has thrived through exporting to the rest of the world and it has created vast new opportunities for foreign businesses to do business in China.

Glassman: Could you grade our new trade deal with China?

Lindsey: I'll give it an "A." The basic deal was, China offered to hack away huge chunks of the Communist state in exchange for our continuing to treat China exactly the same way we had been treating them for the past twenty years. That strikes me as the ultimate and a no-brainer. Even mercantilist-minded policy makers who worry about imports could not find a downside to that transaction. It was China that was offering to change its markets; we were merely offering to maintain the status quo. So I think the fact that China's leaders have recognized that their previous reforms were running out of gas and they needed a new round of market-oriented reforms, and the fact that they realize that WTO membership would be helpful in forcing them to follow-through on those reforms, is great news for China's future and indirectly for the rest of the world. And American businesses will profit if China is able to continue its transition from totalitarian communism where it started out twenty years ago to a full-fledged market economy.

Now, there are some warts and wrinkles on the U.S.-China deal and they are all on the protectionist side in terms of protecting U.S. markets from Chinese competition. We've got a nasty provision in there where we have special safeguards against import surges from China; we have extended discriminatory rules that treat China unfavorably under our already awful anti-dumping law. There are also special provisions that extend protection of textiles and apparel after quotas are phased out in 2005. So, there are a number of add-ons to the U.S.-China deal, protectionist add-ons that a free trader has to hold his nose on.

But, on net our market's openness to Chinese goods and Chinese products is preserved and enhanced by this deal even with the use of these nasty old exceptions.

Glassman: What other trade policies do you think are important or that the Administration ought to just do, that would help technology?

Lindsey: I think there are direct policies that can be pursued and there are some longer shots that might not strike you as obvious. On the direct front, pursuing the Internet tax moratorium and globally, making sure that the Internet remains a free-trade zone I think is an important obvious trade policy goal. Setting good rules on the international taxation of the Internet is especially important particularly in light of Europe's announcement last week of an Internet tax plan, which would require U.S. companies to become tax collectors for the European welfare state. So that's an area where the U.S. needs to zealously defend the health and vitality of the Internet against tax collectors around the world.

More indirectly, progress at the WTO on these fronts is going to be bound up inexorably with the host of other trade issues that have nothing to do with technology. So, as long as developing countries are furious at the United States about its anti-dumping law or furious at the United States about its insistence on grafting international labor standards on the WTO, they are not going to participate in any kind of broad-ranging trade negotiations. So, the Internet community has effectively been demoted in importance on the U.S. trade agenda and put below the interests of textiles and steel and their interest in the anti-dumping law and put below the interest of organized labor and their goals for WTO labor rules.

As a result, the tech community trade agenda is being sacrificed. I don't think there's a lot of recognition on the part of people in tech industries of the linkage between what they want and what other U.S. industries want or protectionist sectors want and how those interrelate. But I think it is an important point to stress that in significant part, the prospect of the tech community for getting things it wants out of the trading system are dependent upon our dropping our foolish protectionist demands on behalf of U.S. industries and U.S. sectors.

Glassman: But aren't there any foreign markets that are still closed to U.S. goods that we should, that we ought to open? Or, has WTO really taken care of those ...

Lindsey: Well, there is a host of trade barriers left in the world. Tariffs in developing countries are still very high.

Glassman: On tech?

Lindsey: On tech issues, there has been more progress. The information technology agreement and the IPA 2 have made substantial progress in hacking away and zeroing out tariffs on a wide range of high-tech products. There are other sorts of more intractable regulatory issues that are retarding the progress of the wired world. For example, a lot of countries still maintain very backward telecommunications regimes that inflate telecom costs and therefore retard the growth of the Internet in those countries, because the hook-up charges, the access charges are so high.

Glassman: Let me ask you about one other kind of trade, one kind of importing that the United States does, and that is the importing of labor - do you consider labor, that is to say, bringing in immigrants, especially in the technology area, to be similar to trade in goods?

Lindsey: Absolutely. And nowhere is it more obvious than in the high-tech sector. Silicon Valley is built on immigrants and you go through the list of the star performers of the semiconductor industry, the computer industry and now the Internet industry and you'll find lots of first-generation Americans. And you'll also find a lot of aliens that are coming in, immigrants that are coming in being attracted by the opportunities here that have the talents that we can make use of and prospering here and helping us to prosper.

At present, there is an ongoing controversy over so-called HI-B visas, which are temporary visas for high-skilled professionals and they are used quite avidly by high-tech firms to get programmers from India and Pakistan, for example, in here on a fairly expedited basis. The use of the HI visa has exploded in recent years and has rammed up against the quota limits. Those quota limits were raised a couple of years ago but already the quota increases have proved to be insufficient and Congress is now once again considering raising or even eliminating the quota. Decatur Institute published a study not too long ago, in the last couple of months, recommending the elimination of this quota.

But the bottom line principle of the benefits of immigration are the same as the benefits of free trade: when goods and services, capital and people can move to where their highest value uses are, the world as a whole benefits. Certainly in the immigration area, the United States has an enormous advantage in that we have what the rest of the world wants and we are a place where the best and brightest of the world want to come and live. It's absolutely foolish of us to deny ourselves the benefit of our popularity and to deny ourselves of the added economic vitality that comes from new blood from around the world.

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