The Magic Window
Published by Yazad Jal September 28th, 2004 in EconomicsThere are two ways we can produce cars. We can build them (in Gurgaon / Pune / Tamil Nadu, etc) or we can grow them. Everyone knows how we build cars. To grow cars, we must first grow the raw material from which they are made–wheat (or rice or onions, etc). We put the wheat on ships and send the ships out into the Pacific. The ships come back with Hondas in them.
From our standpoint, growing Hondas is just as much a form of production–using Indian farm workers instead of Indian factory workers–as building them. What happens when the ships go to Japan is irrelevant. The effect would be just the same if there was a magic window somewhere between Bombay and Tokyo that turned a ship carrying wheat into a ship carrying Hondas.
Tariffs and other trade barriers are a way of protecting Indian workers, from other Indian workers. Import duties on cars benefit workers in Indian car factories to the detriment of all other Indian workers (and yes farmers too!) The same holds for all other import duties. In sum, everybody loses (and a few, very few gain).
I stole this excellent and simple example from David Friedman’s Hidden Order: The Economics of Everyday Life (Page 70 of the hardback edition). The adaptation is mine.
Excellent Example Yazad but then doesn’t it go against your belief that in order to progress India should move towards the services and industry and away from agriculture and that the cities are going to be the salvation of India not the villages.
Going by Friedman’s examples, it looks like India will do just fine if everybody continues to live in villages and concentrates on agriculture - why do we need to invest money in factories et al, we can just grow our way to prosperiy. Would you care to explain your flip-flop (using current US election lingo) on this issue?
It’s an example, CK. Feel free to substitute “farmer” with “call center worker.” Won’t change much.
And you’re falling into the “straw man” fallacy again. Neither Friedman nor I am advocating moving to agriculture and away from industry. Just that trade is as important (if not more).
How do you budget for laws already against cheap agricultural goods in the US and the forthcoming ones against call center workers?
CK,
How do you always manage to miss the point? Is it a talent you cultivate or is it innate?
Chandraskehar, those laws harm US consumers. Why should we copy them and harm our consumers? For a quick and intuitive example, look at free trade ports like Hong Kong and Singapore. 50 years back they were very poor (poorer than India). Now they are amongst the world’s richest. Largely because they used the magic window of trade.
I’m not saying put subsidies / tariffs etc. What I want to know is how you deal with your favourable terms of trade diminishing if the US decides to block outsourcing. Already a lot of investment has been made into this which can’t be as efficiently reallocated elsewhere.
Yes, of course it would be a bad thing for us.
But it would also be a bad thing for them, because companies that used to outsource to us would face higher costs which they’d have to pass on to their customers or close down because of the higher costs, thereby causing unemployment.
But if we “retaliate” by putting sanctions on them, it would be harmful for them because their companies lose business.
But it would also be harmful for us because stuff we used to import will get more expensive for us. And when you think of “stuff that we import” don’t just think of consumer goods which you think we can do without. Think of raw materials and intermediate products which we use for our industries.
The point I want to make is, most people understand that trade is good for us, but not that both legs of the trade, i.e. exports and imports are good for us individually. Importing from them is not a favour we are doing to the US in return for their letting us export to them.
So to answer your question on how to deal with it if the US bans outsourcing, I am afraid there is no easy answer. Lobbying and complaining to the WTO may help.
I am not completely against fighting a trade war. But if we do, we must do it with a very good understanding of the costs involved, because - to repeat - banning imports will cost us as much as, if not more than, it will cost them.
And just like in a real war, we should not get into one that we have no chance of winning. Just like in a real war, we should understand the possibility of escalation. Just like in a real war, we should try other means first.
So I suspect that in most cases, I wouldn’ fight a trade war
Its innate Ravikiran - a natural reaction that occurs in the presence of BS ;)
Ck, By your statement I can infer that every time you see something that you think is BS, your innate reaction is to miss the point. I say — it explains your behaviour quite well! :-)
Didn’t I say?
I’m not saying put subsidies / tariffs etc.
so in other words .. trade what you have in excess and what someone else wants with what you want and someone else ahs to offer. so whats new?
Well you did say that, but I needed to cover all bases while answering.