Skip to comments.Protectionism Cannot Bring Prosperity
Posted on 10/19/2011 7:30:15 AM PDT by Kaslin
It is not often I vehemently disagree with Michael Pettis at China Financial Markets regarding trade. This time I do. Interestingly, there are some points of his recent analysis that I strongly agree with.
Via Email, interspersed with my comments please consider the following point counterpoint discussion.
Expect Still More Trade Intervention
Last weeks Senate bill on Chinese currency intervention predictably enough brought out all the same old arguments about international trade, and just as predictably has widened the opposing positions in the debate. Unfortunately the difference between a good outcome, intelligently negotiated, and a bad outcome, is pretty large, but with each side hardening its position I think the likelihood of a good outcome, while never high, is declining further.
The biggest problem with the debate, I think, is the muddled thinking and half-baked arguments that characterize each side. For example many of those who believe China is cheating on trade go through complicated exercises to prove the currency is undervalued and should be sharply revalued, without considering other relevant factors.
The currency may well be undervalued, but it shouldnt be the only issue taken into account. A significant rise in the RMB, especially if it is countered domestically by an expansion in credit at lower real rates, might actually make the global imbalances worse and, more worryingly, cause Chinas debt burden and capital misallocation to rise. This would make Chinas eventual adjustment far more difficult and would cause more damage to the global economy.
The focus should be more general on shifting Chinas economy towards the more labor-intensive and efficient sectors and an appreciating RMB might actually make things worse, especially if it encourages hot money inflow. It is much better, I think, for China to raise interest rates, for example, than to raise the value of the RMB. We need an internal shift in which resources are transferred from the capital-intensive SOEs towards households as well as to the more labor intensive SMEs, and a rise in the RMB will adversely affect the SMEs far more than it affects the SOEs, and would be no more efficient than in shifting wealth to households than a revaluation.
In general I have no disagreements with the ideas presented above. However, if China raises interest rates, it will, without a doubt, place upward pressure on the valuation of the Yuan.
Interest rates are not the only factor in relative currency movements, but interest rates, and more importantly, rates of change in interest rates are two of the most important factors.
That said, I wholeheartedly endorse the idea that "complicated exercises to prove the Yuan is undervalued" are seriously misguided.
The other side of the debate is unfortunately even more muddled. The US-China Business Council, for example, issued a release on October 12 that exemplifies some of the major misunderstandings on trade. I realize that the USCBC is primarily an advocacy group, and so their arguments are aimed at supporting a position rather than adding to the debate, but I wonder if making arguments that are so easily refuted helps their cause.
The USBC makes two claims: first, that a revalued RMB will hurt US households, and second, that it will have no employment impact in the US. The first argument is incomplete and the second wrong. Here is what they said in their October 12 release.
USCBC believes that the currency legislation passed yesterday by the US Senate will do more harm than good. USCBC continues to advocate that China needs to move faster toward a marketdetermined exchange rate; passing tariff legislation on imports from China will not get us closer to this goal and will hit the pocketbooks of American households at a time they least can afford it. Limiting imports from China would not mean an increase in US employment or lower the trade deficit; well just shift our imports to another overseas supplier. If this is intended to be a jobs bill, it is a jobs bill for Vietnam, Indonesia and Mexico.
For their first point, we should be clear. Tariffs will hurt the pocketbooks of American households as consumers, but it will not hurt American households as workers and will probably help them.
Muddled is the appropriate word.
On one hand Pettis is correct: US consumers will be hurt. However, Pettis is incorrect in his belief that tariffs create jobs.
Pettis ignores the unseen. For starters he assumes China will not retaliate. I suggest China may retaliate even if it is not in China's best interest to do so.
The Smoot-Hawley tariff act in the Great Depression certainly provides an example of what happens when trade wars start and global trade collapses.
Forget about all of that. Let's take a simple example from my post on October 2: Trade War Threat Looms Once Again; Senate Takes Up Bill to Punish China for Manipulating Currency; How Many Jobs Would Tariffs Create?
Pettis:Tariffs Will Cost Jobs
Anyone who thinks government officials can determine if and when currencies are "misaligned" has no economic sense, is engaging in populist rhetoric to buy votes, or both.
The clowns at the Economic Policy Institute think tariffs will create 2 million jobs and reduce the trade deficit by $120 billion.
I suggest tariffs will cost jobs. Manufacturing will not return to the US, nor will manufacturing of any sort, on account of tariffs. Wage differentials are too great and trade channels will simply shift (at great expense) to another country.
However, prices will rise, sales will slow, and the squeeze on consumers will accelerate. Here is a simple example: Let's assume a 35% tariff on underwear. How many jobs will return to the US ? 50? 100? Any?
Let' be generous and assume 500 (although the answer is most likely zero). In return for those 500 jobs, everyone in the United States has to pay 35% more for underwear? Is that a good trade-off?
Clearly the answer is no, but it is much worse than that. We also need to address the question "how many jobs would be lost because underwear is 35% higher?"
Whatever additional money is spent on underwear by 300 million Americans will come at the expense of those consumers spending less on something else, perhaps eating out, perhaps buying toys, or perhaps buying shirts.
To save 500 or whatever manufacturing jobs, everyone buying underwear will cut back on something else. Those cutbacks will have a real effect on shipment of goods (trucking), eating out, recreation, etc., just to benefit underwear manufacturers.
Magnify the underwear example by the vast numbers of idiotic lawsuits from manufacturers that will stem from a law that only requires some bureaucrat to figure out if a currency is misaligned. Then figure out how much bureaucratic expense and waste will that cause?
Lindsey Graham and Mitt Romney are definitely on the wrong side of this issue.
If Congress is foolish enough to pass such a law, and president Obama is foolish enough to sign it, expect to lose a half million jobs minimum because of it. Depending on retaliations and how things escalated, 2 million jobs lost would not be surprising in the least.
Protectionism Cannot Bring ProsperityWe do not have 'free trade', but rather 'managed trade', guided by the long refuted ideas of mercantilism on the part of many nations. Alas, the populist demand for protectionism always has and always will be inviting economic disaster.
It is a demand that refuses to see the other side of the coin. Trade is not 'between nations' it is between individuals. It is voluntary and it would not take place if not both parties to a trade were gaining from it.
What domestic producers lose in pricing advantage, consumers gain in the form of lower prices and rising living standards. Moreover, the money consumers save on account of being able to buy cheaper goods is then free for investment in other economic activities where a comparative advantage exists. It is not a coincidence that throughout history the richest places on earth were always the centers of free trade.
If protectionism could bring about prosperity, then the most isolated villages in the Hindu Kush would today be utopias of riches envied by all. They obviously are anything but.
I prefer to buy and build American but a lot of the outsourcing is our own fault. Overtaxed, overregulated, and overunionized is no way to bring manufacturing back to the USA.
Americans first! Not the Chinese, Mexicans, Indians or South Koreans!
Don’t let the union thugs increase our cost of living.
ahh...but it will bring votes, and I suspect that it is going to.
There is a difference between protectionism and self-defense.
Since so much of world trade emanates from non-free trade countries, pretending to have “open” trade with them is a lie about sharing free markets when we really don’t.
I believe in taxes on duties, imposts, and excises. They are specifically indicated in the Constitution, and the first two amount to “taxes” on imports.
If you have the best theme park in the world, those who come there to play will pay a premium. If you have the best market in the world, then paying to play only makes sense.
I don’t think the tired old “Smoot-Hartley tariif caused the Great Depression” fits anymore. When we get in a trade war with European nations who were actually buying our goods thats one thing. How many goods produced in the U.S. are China and Mexico or these other third wold countries buying?
>> Don’t let China sell ANYTHING in the USA. Protect American Jobs. <<
Sure. Let’s shut down Walmart and eliminate all those Unamerican Walmart jobs.
Well it looks like neither can “Free Trade”!
Anyone who thinks “free trade” will solve the problems of our government spending too much money, and various other things (such as forcing banks to give mortgages to people who cannot afford homes), is barking up the wrong tree.
That is very very economically unhealthy for the private sector.
Also, China does not have the environmental, retirement, medical, worker safety laws, etc. in place that the US does...those cost money and that is reflected in the price of US manufactured goods, wages aside.
The true wealth of a nation is measured by the harvesting & refinement of domestic natural resources that are consumed within its own borders. Exports are gravy profits. No such manufacturing, no real value in the economy - no value globally for the country in question currency.
The idiots 'occupying America' cannot understand that Wall Street, The Federal Reserve, The US Congress (laws written for us by contributing lobbyists basically), the Treasury, Fannie, Freddy etc., have been working together to destroy the US middle class.
They have almost succeeded.
With corporate income taxes at 35%, 'cronified' tax loopholes for the top/favored political corporate contributors, the EPA, etc...over 50% of industry has vacated US soil.
There is no such thing as 'free' trade.....the US blue collar worker and the poor Asian slave laborers are paying the price.
Millions of clerical, accounting, shipping, maintenance, mid-level managerial & engineering jobs have also off-shored too.
Look at the poor countries in Africa...what do they all have in common...virtually no industry to produce domestic consumables or domestically made industrial equipment to fabricate those consumables.
Can anybody refute this?
Don't let China sell ANYTHING in the USA
So let's say I usually buy Chinese tea at my high end supestore for $100. On vacation in China, I meet a second cousin who will sell it direct to me for $50. How is you taking my $50 per month in any manner a "conservative" solution?
I am tired of people who think Wal Mart is the only business that imports from China. I find lots of things at Wal Mart that is made in the US.