Against Trade War
I’m a huge fan of Robert Samuelson’s long repeated harping on the coming Medicare train wreck – tell it brother! But I much oppose his war-mongering:
No one familiar with the Smoot-Hawley tariff of 1930 should relish the prospect of a trade war with China — but that seems to be where we’re headed and probably should be where we are headed. Although the Smoot-Hawley tariff did not cause the Great Depression, it contributed to its severity by provoking widespread retaliation. Confronting China’s export subsidies risks a similar tit-for-tat cycle at a time when the global economic recovery is weak. This is a risk, unfortunately, we need to take. …
The trouble is that China has never genuinely accepted the basic rules governing the world economy. … China’s worst abuse involves its undervalued currency and its promotion of export-led economic growth. …. China’s underpricing of exports and overpricing of imports hurt most trading nations. … One remedy would be for China to revalue its currency, reducing the competitiveness of its exports. … [Some say] a revaluation of 20 percent would create 300,000 to 700,000 U.S. jobs over two to three years. …
If China won’t revalue, the alternative is retaliation. This might start a trade war, because China might respond in kind. … More realistic would be a replay of Smoot-Hawley, just when the wobbly world economy doesn’t need a fight between its two largest members. Economic nationalism, once unleashed here and there, might prove hard to control. But there’s a big difference between then and now. Smoot-Hawley was blatantly protectionist. Dozens of tariffs increased; many countries retaliated. By contrast, American action today would aim at curbing Chinese protectionism. (more)
Relative currency values set relative prices. China’s current currency level now sets low prices for the stuff it sells to others, and high prices for the stuff it buys from others. You might dislike this if you compete with China to sell stuff, but you should mostly love it if you buy stuff from China, or compete with them to buy stuff. Often you should love it if you sell stuff to China. Low China prices do not obviously hurt the non-Chinese overall.
Fear of being outcompeted in selling stuff is a terrible reason to start a war! If someone is outcompeting you in selling stuff, well either step up your game or step aside. That is how supply and demand should work. We want a system where stuff is produced by the lowest cost suppliers and goes to the buyers who value it the most. If some supplier offers to sell stuff to folks at a lower price, well then we want folks to switch to buying from that supplier. If a supplier offers an unsustainably low price, it will soon go broke and buyers will switch away.
This logic applies just as well to distant nations as it does to a convenience store down the street. Don’t be fooled into treating China differently because you were built to fear foreigners. Wars are not needed or wanted as part of our supply and demand adjustment process!
I don't understand how I can have read so many words and grokked so few rational arguments. I feel like I've been dropped into some bizarro universe where my universe's basic economic theory doesn't exist in any form - where some people are stating completely obvious truths, and the others are rambling completely irrationally and insanely with theories that have never even been suggested by reality.
My God... Is this what it's like to be Glenn Beck?
Joking aside, tariffs are borne of fear of foreign nations, short-sighted selfishness, and the idea that self-sufficiency is superior to wealth (an idea that microeconomics China has been all-too-happy to reject with increasing force, regardless of the party line). Assuming that trade relationships are not destabilized by e.g. wars (which would make self-sustenance a good thing), there is no economic benefit to tariffs.
a non-floating currency can only be undervalued or overvalued to the extent that the utility of its backed real-world entity provides a given actor - and since it's typically gold, there's virtually no capacity to undervalue or overvalue at all, since only a handful of livelihoods actually make use of gold in a non-currency sense. A floating currency can have absolutely no under- or over-value of any kind, even in theory. Everything is worth what its purchaser will pay for it; this includes currency. If one side is getting the short end of the stick, it's because they're willingly entering into an irrational decision. Fools and their money are soon parted - this is a truth that governments have repeatedly failed to ever remedy (not that I would want them to, personally).
Economics simply work; anything that makes it appear otherwise is politics and scheming, or nationalism wherein you think your neighbor down the street has more of a privilege to opportunity than some faceless Chinaman, or wherein you believe there can be no situation in which China can ever be a more efficient producer of any good or service whatsoever than America can.
The problem with treating China like the sun giving us free light is that under no circumstances will the sun ever buy American exports. Whereas, if the Chinese bought certain American exports where American manufacturing had a comparative advantage, on balance this would be good for America. But currency manipulation ensures a certain level of economic inefficiency. But there are certainly winners on the American side for this as well.