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How should we encourage exports? (And should we?)

Summary:
Lots of non-economists think that economics is just common sense. Not so. It's not common sense that imports help an economy, or that price gouging is good and rent controls are bad. And the field of taxation also produces lots of surprising results. The following list refers to equal size, across-the-board taxes: 1. Consumption taxes = wage taxes. 2. Import tariffs = export taxes 3. Import subsidies = export subsidies 4. An import tariff plus an equal export subsidy cancels out 5. A fair tax system taxes only wage income, not capital income. I'm going to use some of those ideas when considering a recent post by Noah Smith, which discussed research showing that firms that began exporting

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Lots of non-economists think that economics is just common sense. Not so. It's not common sense that imports help an economy, or that price gouging is good and rent controls are bad. And the field of taxation also produces lots of surprising results. The following list refers to equal size, across-the-board taxes:

1. Consumption taxes = wage taxes.

2. Import tariffs = export taxes

3. Import subsidies = export subsidies

4. An import tariff plus an equal export subsidy cancels out

5. A fair tax system taxes only wage income, not capital income.

I'm going to use some of those ideas when considering a recent post by Noah Smith, which discussed research showing that firms that began exporting tended to have faster productivity growth. He suggested that we might want to use public policy to encourage exports. I agree, but am not in favor of his preferred method:

The U.S. currently does some export promotion, via the Export-Import Bank. But this tends to focus on large companies that are already competitive in world markets. A better approach would be to provide assistance for companies to start exporting, by providing them with targeted loans, information about foreign markets and assistance developing overseas sales operations.
When I think of the government doing something, I think of the department of motor vehicles. (I need to visit the California DMV Monday---wish me luck.) I don't trust government to run that sort of program efficiently.

Fortunately there is another way to boost exports---reduce taxes on imports. The beauty of this proposal is that it's likely to make the US economy more efficient even if the research Smith cites is 100% wrong. That's because trade barriers create inefficiency, what economists call "deadweight loss".

I also take issue with this claim:

Also, the U.S. should consider being less tolerant of countries that intervene in markets to keep their currencies cheap versus the dollar -- as China did back in the 2000s. This acts as a subsidy for those countries' exporters, but it's also effectively a tax on imports from the U.S. Getting tougher on currency manipulation could help U.S. companies start selling overseas.
I've recently done several posts arguing that "currency manipulation" is a myth. But even if I am wrong, currency manipulation is not at all like a subsidy to exports and a tax on imports. Indeed a subsidy on exports and a tax on imports would exactly offset, leaving no effect on trade. After all, exports are how China pays for imports. (That sort of tax/subsidy scheme would be like a 10 cent/gallon subsidy for gas stations combined with a 10 cent tax on gas consumers--no effect.)

People who worry about currency manipulation clearly do believe it affects trade. They believe that currency manipulation caused more exports and fewer imports today. (They rarely mention that this reverses in the long run, and it would cause China to export less and import more in future years.)

Taxes and subsidies are not the same as price changes, because taxes and subsidies drive a wedge between what sellers pay and what buyers receive, whereas price changes (including exchange rate changes) do not. They are completely different situations, and should not be confused with each other.



Scott Sumner

Scott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP—i.e., real GDP growth plus the rate of inflation—to better “induce the correct level of business investment”. In May 2012, Chicago Fed President Charles L. Evans became the first sitting member of the Federal Open Market Committee (FOMC) to endorse the idea.

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