As someone who lives in Luxembourg, I have enjoyed this place a lot but this article ignores a few key factors.
1. Technically, GDP per capita is that high. However, around half of the working population are cross-border workers who commute daily from Belgium/France/Germany. In other words, half of all workers are not included in "per capita" but still are included in "GDP" measures since they don't live in Luxembourg.
2. Luxembourg, as part of the EU, does not set its own tariff policies. Even if the EU were to increase tariffs, the price differences between Luxembourg and its neighbours are so significant that it would take very high tariffs for indirect effects to be felt here. Even while being part of the EU single market, a lot of residents in Luxembourg drive across the border to do their shopping. (Though gasoline and cigarettes are cheaper here because of lower taxes.)
3. Luxembourg's economy is largely in services, most notably financial (alone approximately 25% of GDP). So the effects of tariffs and the significance of trade deficits are not identical here as they would be even in other European countries like Denmark or neighbouring Belgium or Germany.
4. Luxembourg attracts foreign capital because of its reputation for low corporate taxes. Should other countries copy this, it is unclear that Luxembourg would still have as big of a comparative edge. To some extent, Luxembourg's success relies on other countries having higher taxes. In a fully low tax or no tax environment, Luxembourg would still retain some advantages (low corruption, high quality of life, etc.) but not as much as now.
Life in Luxembourg is mostly great for most people. Though the ability to universalize the lessons of a (very) small state are somewhat limited. Luxembourg does not have a massive domestic market like the United States or China. Meanwhile, the country has had completely free public transport throughout the country (include national railway until the border), which is something Bryan probably would hate.
Libertarians seem to think that every single country in the world can be a tax haven/regulatory loophole. By definition these are unscalable niches.
The real question is "how do we generate wealth at scale for developed countries". That requires more then being a middle man or exploiting "one weird trick."
I second this. Also, "The State in the Third Millennium" by Hans-Adam II, Prince of Liechtenstein, is possibly the most libertarian book written by a monarch.
I think it's important to be careful here when discussing how GDP is measured lest you give (false) ammunition to the folks who claim that "imports subtract from GDP because the identity has -IM in it"
GDP measures production. Expenditure is just an indirect way of measuring it. But GDP is *not* expenditure. It is *equal* to C+I+G+NX but it is not C+I+G+NX
So how can a country export more than it produces? This ones tricky since at first glance it may seem impossible. The answer is re-export.
Suppose we have a (strange but simple) economy that has no domestic consumption, investment or government. C=I=G=0. But this country imports 10$ worth of (intermediate) goods and then costlessly and immediately reexports these for 20$ on world market. The value added of reexporting these goods is 20-10=10 and that's its GDP. But measured exports are 20. So export/gdp ratio is 2.
The formula still works 10=Y=0+0+0+20-10
Of course if the imports disappeared in this case the exports would too and GDP would go to 0. In that sense imports *add* to GDP
Of course the key question is why this particular country is able to do this? Why can't other countries simply also import those intermediates for 10$ and add their own value? Thats a whole separate post.
Interesting aspect though is what would happen if this country, instead of reexporting these goods, consumed them instead. C=10, EX=0, IM=10. So Y=0.
So 1) if imports are used for final consumption they neither add nor subtract from GDP (in an accounting sense)
2) if imports are intermediaries that are re exported imports *add* to GDP since they make domestic production possible
Luxembourg doesn't set up its own trade policy though. As a country in the Schengen zone, it has the exact same trade policy as famous libertarian champions like France.
Maybe Singapore or HK would be a better choice. Perception of Luxembourg is bureaucracy, not freedom of trade. I know I am generalizing but it is largely like this.
Luxembourg is also totally helpless militarily and has no possible option of being self sufficient industrially. We are in a position where we can ask: is it worth some economic inefficiency to have a domestic steel (or whatever) industry? We are also in a position to ask: should we throw our weight around (and take an economic hit) to stand up for intellectual property rights? Our demographics are also different. I don't know much about Luxembourg, but perhaps they don't have a floundering class of men for whom you might ask, are we ahead to use protectionism to keep jobs for these guys instead of putting them on welfare and watching them descend into drug abuse and alcoholism?
I'm no protectionist, but I don't think people opposing full free trade are all morons either.
The national security angle is the one angle that makes sense. People like Noah Smith think long and hard about the trade offs and which supply chains are most important to protect. People like Trump think tariffs are just panaceas with no downsides and apply them with no special consideration to protecting supply chains.
As someone who lives in Luxembourg, I have enjoyed this place a lot but this article ignores a few key factors.
1. Technically, GDP per capita is that high. However, around half of the working population are cross-border workers who commute daily from Belgium/France/Germany. In other words, half of all workers are not included in "per capita" but still are included in "GDP" measures since they don't live in Luxembourg.
2. Luxembourg, as part of the EU, does not set its own tariff policies. Even if the EU were to increase tariffs, the price differences between Luxembourg and its neighbours are so significant that it would take very high tariffs for indirect effects to be felt here. Even while being part of the EU single market, a lot of residents in Luxembourg drive across the border to do their shopping. (Though gasoline and cigarettes are cheaper here because of lower taxes.)
3. Luxembourg's economy is largely in services, most notably financial (alone approximately 25% of GDP). So the effects of tariffs and the significance of trade deficits are not identical here as they would be even in other European countries like Denmark or neighbouring Belgium or Germany.
4. Luxembourg attracts foreign capital because of its reputation for low corporate taxes. Should other countries copy this, it is unclear that Luxembourg would still have as big of a comparative edge. To some extent, Luxembourg's success relies on other countries having higher taxes. In a fully low tax or no tax environment, Luxembourg would still retain some advantages (low corruption, high quality of life, etc.) but not as much as now.
Life in Luxembourg is mostly great for most people. Though the ability to universalize the lessons of a (very) small state are somewhat limited. Luxembourg does not have a massive domestic market like the United States or China. Meanwhile, the country has had completely free public transport throughout the country (include national railway until the border), which is something Bryan probably would hate.
+1
Libertarians seem to think that every single country in the world can be a tax haven/regulatory loophole. By definition these are unscalable niches.
The real question is "how do we generate wealth at scale for developed countries". That requires more then being a middle man or exploiting "one weird trick."
Bryan, have you ever visited Liechtenstein? Also a small, but rich European country. And even more open to trade than Luxembourg.
I second this. Also, "The State in the Third Millennium" by Hans-Adam II, Prince of Liechtenstein, is possibly the most libertarian book written by a monarch.
I think it's important to be careful here when discussing how GDP is measured lest you give (false) ammunition to the folks who claim that "imports subtract from GDP because the identity has -IM in it"
GDP measures production. Expenditure is just an indirect way of measuring it. But GDP is *not* expenditure. It is *equal* to C+I+G+NX but it is not C+I+G+NX
So how can a country export more than it produces? This ones tricky since at first glance it may seem impossible. The answer is re-export.
Suppose we have a (strange but simple) economy that has no domestic consumption, investment or government. C=I=G=0. But this country imports 10$ worth of (intermediate) goods and then costlessly and immediately reexports these for 20$ on world market. The value added of reexporting these goods is 20-10=10 and that's its GDP. But measured exports are 20. So export/gdp ratio is 2.
The formula still works 10=Y=0+0+0+20-10
Of course if the imports disappeared in this case the exports would too and GDP would go to 0. In that sense imports *add* to GDP
Of course the key question is why this particular country is able to do this? Why can't other countries simply also import those intermediates for 10$ and add their own value? Thats a whole separate post.
Interesting aspect though is what would happen if this country, instead of reexporting these goods, consumed them instead. C=10, EX=0, IM=10. So Y=0.
So 1) if imports are used for final consumption they neither add nor subtract from GDP (in an accounting sense)
2) if imports are intermediaries that are re exported imports *add* to GDP since they make domestic production possible
Luxembourg doesn't set up its own trade policy though. As a country in the Schengen zone, it has the exact same trade policy as famous libertarian champions like France.
Maybe Singapore or HK would be a better choice. Perception of Luxembourg is bureaucracy, not freedom of trade. I know I am generalizing but it is largely like this.
Luxembourg is also totally helpless militarily and has no possible option of being self sufficient industrially. We are in a position where we can ask: is it worth some economic inefficiency to have a domestic steel (or whatever) industry? We are also in a position to ask: should we throw our weight around (and take an economic hit) to stand up for intellectual property rights? Our demographics are also different. I don't know much about Luxembourg, but perhaps they don't have a floundering class of men for whom you might ask, are we ahead to use protectionism to keep jobs for these guys instead of putting them on welfare and watching them descend into drug abuse and alcoholism?
I'm no protectionist, but I don't think people opposing full free trade are all morons either.
The national security angle is the one angle that makes sense. People like Noah Smith think long and hard about the trade offs and which supply chains are most important to protect. People like Trump think tariffs are just panaceas with no downsides and apply them with no special consideration to protecting supply chains.
#2 isn't competly correct. They only add to GDP if they are exported for a higher price than they are imported.
If someone miscalculates and ends up having to sell at a loss, GDP would be negative.
You posted the same comment repeatedly. Please delete the redundant ones.