Gov. Tim Pawlenty’s trade mission to China is not likely to accomplish much in increasing trade or investment flows. But in practical terms, he had little choice about going.
What states do is largely irrelevant in terms of increasing or decreasing a nation’s overall exports or imports. Nor are their actions likely to alter foreign investment here or U.S. investment abroad. But once a few states start spending money on trade or investment promotion, other states feel compelled to follow suit.
Belief in the usefulness of trade missions is a classic case of what philosophers call a “fallacy of composition.” This is the erroneous belief that what is true for one must necessarily be true for many.
If an individual state spends taxpayer dollars promoting exports, it may achieve some change. Most such change, however, involves luring deals that otherwise would happen in another state. However, when all 50 states spend money in this way, the overall change is small for the nation as a whole.
This is not to argue that government can play no useful role in fostering international commerce. Free-market purists do make this argument against government-sponsored trade development initiatives. If private firms might gain from international trade, they already have an incentive to do whatever is necessary to make the deals happen, such economists would argue.
Clearly, firms like Medtronic, 3M and Cargill don’t need help exporting or importing. Nor do many smaller firms. Market forces provide all the incentives most firms need.
There is a point, however, at which markets fail, and government action may make society better off. This is when there is an “information problem.” Large firms have staff with skills or experience necessary to initiate international business. Small firms don’t have this information in-house. They may not even know how to hire a consultant.
Government agencies, like the U.S. Department of Commerce or Minnesota’s Department of Employment and Economic Development, have some economies of scale in providing information. They may furnish valuable expertise to fledgling businesses at a lower cost to society than if each firm had to search it out on its own.
That said, economic studies show that state trade missions are very costly compared to the resulting net increases in trade. Like state subsidies to attract automobile plants, resources get dissipated in an “economic war between the states.” The benefit to the overall national economy is small or even negative.
Yet the governor is in a bind. Former Gov. Jesse Ventura led several such missions. Governors of neighboring states lead missions. It would take a courageous governor indeed, deeply imbued with free-market principles, to say, “These trade missions are ineffective hype. We can spend our money more productively.”
Opponents in the next election would condemn this as callous disregard for the economic interests of the state. It is much less likely that a governor would be criticized for spending public resources on ineffective efforts.
A broader problem with state-funded trade promotion programs is that most are sharply mercantilistic in outlook.
Mercantilism was the economic philosophy that argued exports were good and imports always bad. Adam Smith wrote his famous book “The Wealth of Nations” precisely to refute this erroneous belief.
Nevertheless, state development agencies routinely issue press releases touting export deals made with their encouragement. They seldom boast of increased imports. Businesses seeking to buy things from China may be welcome on a Minnesota trade mission, but news stories uniformly feature exporters rather than importers.
Such mercantilism reflects erroneous — but popular — thinking. Unfortunately, governors don’t win votes and administrators don’t get promotions simply for correcting mistaken beliefs for the general public.
Views of international investment also are skewed. A new Nissan plant in Tennessee is good, because it creates jobs. However, a new Donaldson factory making air filtration equipment in China is thought to be bad. Better to make them in Minnesota and then export to China, many believe.
States have spent billions to attract foreign-owned factories in the last two decades. No state spends money to get firms to invest abroad. Fortunately, Minnesota has not been as profligate as Tennessee or Alabama in subsidizing new factories.
Ironically, while we like new factories, we often become skittish when foreigners want to buy an existing facility. Congress balked when the Chinese oil company CNOOC bid for Unocal earlier this year, and the offer eventually collapsed. The government of China owns a large fraction of CNOOC, so it was far from a pure free-market transaction.
This aborted deal raises questions for Minnesota. If Chinese ownership of oil resources is a problem, what about Chinese firms buying Minnesota taconite mines? Should we worry about foreign ownership of a strategic resource? Or should we welcome any investment that might bolster the economy of the Iron Range?
© 2005 Edward Lotterman
Chanarambie Consulting, Inc.