Posts
In a recent post I explained that
China's manipulations of its own currency hurt only herself and not her trading
partners and, therefore, retaliatory tariffs were not warranted and would be
self-defeating anyway. China harms herself by causing her own money supply to
expand, which destroys capital through malinvestment and causes prices to rise
domestically. Retaliatory tariffs cause American goods to rise in price,
resulting in a recession and general lower standard of living. Few economists
claim otherwise.
It seems that everyone is in favor of free
trade, as long as it is the other guy who must compete with foreign products.
When it comes to their own products, the most typical response from American
manufacturers begins with the caveat that "although free trade is
beneficial most of the time, it causes harm under certain circumstances." There
follows a convoluted chain of cause-and-effect purporting to prove that lower
priced foreign goods would hollow out America's key manufacturing industries
and turn America into a second class nation.
The purpose of this brief response is to
counter these claims and explain why understanding economic theory is vital to
the argument in favor of free trade.
There are two books which address the
fact that we cannot experiment with an economy the way that physical scientists
do. We must use logic to form irrefutable conclusions of what MUST happen, even
if we cannot see it! The first is Frederic Bastiat's early nineteenth century
classic That Which Is
Seen, and That Which Is Not Seen.
Henry Hazlitt's updated the book a hundred years later in order to appeal to
modern readers. His Economics in One Lesson employs a series of short stories to illustrate that
one must always consider the economic effects of an intervention on all and not
just a few actors, plus, that one must look to the long term effects of an
intervention and not just the short term effects.
So, let's use logic to consider the
effects of China's economic interventions on itself and its trading partners
who do nothing to retaliate against China in any way.
1. China uses its
capital in an inefficient way. Outright subsidies to any industry must be
paid by someone. The very fact that China believes that it cannot compete in
certain industries to its own satisfaction without subsidies is an admission
that these industries are inefficient. Therefore, Chinese internal subsidies
are transfers of capital from more efficient industries to less efficient
industries. Put another way, if the targeted industries already were very
efficient, more capital would flow to these industries and subsidies wouldn't
be necessary.
2.
Monetary expansion to fund an industry causes overall higher prices and
malinvestment. This is the classic
Austrian Business Cycle Theory. China may very well expand its steel industry,
for example, with monetary expansion, but such action will disrupt the time
structure of production and result in a higher price level and a recession.
Other factors of production that feed the Chinese steel industry will rise in
price, necessitating another round of currency expansion, which will lead to
even higher prices and another recession. It's a vicious cycle that can end
only with an end to currency expansion.
3.
China's overall economy will be less developed, weakening the impact of
subsidies to targeted industries.
Because capital is stripped from more efficient industries, China's ancillary
industries will be less developed, harming the targeted steel industry
indirectly. Public infrastructure may be less than it would be otherwise, for
example. The many business-to-business goods and services that feed the steel
industry will lack the capital to expand. The workforce may lack adequate
education. The list is endless. China's economy will lack coordinated growth,
as was so apparent in the moribund economies of the old Soviet bloc. The point
is that something must be sacrificed to aid the targeted industry. Of course,
this is a classic Bastiat "Not Seen" scenario.
4.
American products get cheaper and gain market share. It may be true to some small extent that the steel
industry, for example, may not be able to expand and may even contract in the
face of equal quality Chinese steel that can be purchased at lower prices. But
all the many American manufacturing firms that USE steel will have a lower cost
of production and, therefore, will be able to expand their markets. Again,
something has to give; i.e., the Chinese may be able to sell more steel to
American manufacturers, but these manufacturers can sell more finished goods
into the world market.
5.
American industries benefit from the general expansion of all levels of
production. This is a corollary to
number three above but opposite. Because the companies that use cheaper Chinese
steel reduce their costs, passing along the savings to customers in the form of
lower prices, passing along the increased profits in the form of dividends to
shareholder, increased investment in their own firms, or a combination of
above. The reason for this beneficial prospect is that America becomes more
capital intensive, and that capital came in the form of a gift from China.
6.
Chinese subsidies actually become subsidies to Americans' standard of living. The purpose of production is consumption. Although we
may give lip service to how much we love our jobs, what we really mean is that
we are satisfied with the life style that we can obtain through meaningful
labor. I truly doubt that many of us would work if we were not paid. Chinese
subsidies allow us the option to work less for the same standard of living or
work as long yet enjoy a higher standard of living because our pay goes
further. We workers have more options. For example, as we become richer through
Chinese subsidies, mothers may opt for part time work instead of a full time
job, or they may leave the workforce altogether. Fathers may decide to pursue
lower paid but less stressful careers. Let us not forget that leisure is a
valuable good in and of itself.
Conclusion
Finally, the idea that all subsidies can
be eliminated worldwide and businesses can compete on a level playing field is
a foolish idea. What is the definition of a subsidy? Is it government provided
healthcare? How about a state or municipality forgiving business taxes in order
to entice industries to expand or relocate? If the government builds a super
highway near a plant, is this a subsidy? Likewise, industries in many developed
economies decry the fact that undeveloped countries have lower environmental
standards, worker safety requirements, and worker rights. Periodically one
reads that the European Union is threatening a member for having taxes that are
too low and, thus, provide an indirect subsidy.
Capitalists must accept all of these
interventions by foreign governments as part of the unknown and uncontrollable factors
of conducting business and not lobby their own governments to take self
defeating economic reprisals. Unilateral free trade is the best and only real
option.
