Slow Learners

It’s been two centuries since Adam Smith and David Ricardo gave us the double whammy of arguments for free trade, but too many politicians still don’t get it. Congress is now considering a bill that would allow for tariffs on goods imported from another country if the Treasury finds that its currency is “misaligned,” i.e., not as strong as the Treasury thinks it should be. The current standard is stricter, requiring a Treasury finding that the country has intentionally manipulated its currency to keep it low.

Americans generally, and somewhat stupidly, clamor for a strong dollar. Stupidly not because a strong dollar is necessarily bad, but because they also clamor for strong exports, and a strong dollar make our exports more expensive for folks in other countries, reducing how much of our stuff they’re willing to buy. (On the other hand, a strong dollar is great when you’re traveling in another country.) So the concern with currency manipulation is that some countries are artificially keeping their currency weak to encourage exports to the U.S.

I’m being coy in talking about “some countries.” Obviously we’re talking about China. And the concern is that China’s encouragement of exports is causing economic harm to the U.S. through job losses. If we didn’t buy it from China, the argument goes, we’d have to make that stuff ourselves, and then we’d have more jobs, and then our economy would be stronger.

Adam who?

If GM lowered the price of its cars so they could sell them for less than Ford does, we’d say it was a big win for the American consumer. But if China sells something for less, we stop caring about the consumer and call it a big loss for American labor. (Consistency: It ain’t a political virtue.)

But if we force Americans to pay more for the goods coming from China, it doesn’t necessarily mean they buy those goods from American manufacturers instead. Given that we all have limited resources, for each individual consumer it means one of two things. Either they choose not to buy that good at all because it’s too expensive, or they buy that good anyway but then have less money left over to buy other goods, or to go out to eat, or to the movies, etc., etc. What happens to jobs in those sectors? Here’s a hint: When George W. Bush imposed tariffs on imported steel, it cost more jobs in domestic steel-using industries than it saved in the domestic steel-producing industry.

Ricardo? Ricky Ricardo? He was an economist?

The primary congressional argument against it seems to be that it might ignite a trade war. Perhaps true, but not really the primary issue, and it suggests that even the opponents in Congress don’t really understand the issue. Yes, trade wars are bad. But limiting inexpensive imports is the real issue, because it’s bad for consumers. Let’s be blunt–this is a kick in the nuts of American consumers who right now don’t have a whole lot of extra cash to spend.

I wish Obama would take a firm stand against this. So far he has not, although a White House spokesperson suggested discomfort with the bill. But politically I think I get what Obama’s doing. This bill has bipartisan support, and will be popular with the public. Obama’s instincts are probably to support it, but his economic advisers are probably telling him why it’s a bad thing. And even if he’s persuaded by his advisers, he may be wise not to take a strong stand until he has a better count of who’s for and against it. The worst thing for him right now would be to take a politically unpopular stand right now and lose. The only chance he’ll take a stand against this is if he can definitively win. I don’t like that it works out that way, but if I was his political adviser, that’s what I’d tell him to do.

Democracy would be great, if only the public understood the issues better.


About J@m3z Aitch

J@m3z Aitch is a two-bit college professor who'd rather be canoeing.
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3 Responses to Slow Learners

  1. Dr X says:

    I’m acquainted with the argument and have long agreed with it, but a question occurs to me? If this is essentially a subsidy to American consumers, paid for by the Chinese people (via local inflation)–if it is, in effect–a transfer of wealth to Americans, why would the Chinese government pursue this policy? Are they economically stupid?

    From where I’m sitting, they appear to generally know what they’re doing, but do you see undervaluing of the Chinese currency as a foolish move on their part? Or is it 6 of one, half-dozen of the other, or do they gain anything keeping the yuan low? If they gain something with a relatively undervalued currency, why wouldn’t it be to the advantage of Americans if the dollar/yuan is increased?

    What I’m having trouble with is that either they’re being dumb (and they don’t seem dumb) or maybe things aren’t so simply and obviously advantageous for Americans in this current arrangement.

    One other thought/question: my understanding is that the Chinese are keeping the yuan undervalued by buying dollars. Could the US government start buying yuan to offset their currency manipulation–effectively a tariff in response to a tariff? I never hear this suggested. All the talk, so far as I know, involves direct tariffs.

  2. James Hanley says:

    Could the US government start buying yuan to offset their currency manipulation

    Theoretically, sure. But in our current position, we’d probably have to borrow money from the Chinese to do it!

    As to whether subsidizing exports is a stupid move on their part, that’s a bit trickier. I like to assume decision-makers are relatively rational, but you can rationally pursue a mistaken policy. And there have been enough governing decision-makers in various countries over the years that have pursued mercantilist/protectionist policies that it’s hard not to assume, if not stupidity itself, a very common ignorance. So one response to the question would be, “why would we expect the Chinese to be any smarter than any other country’s leaders?”

    Another way–the way I think is probably correct–is to look at who benefits. Most of China’s manufacturing companies are owned by elites who are well connected politically (including the military). Firms that are exporting benefit from subsidies whose cost is widely distributed across the population. So why shouldn’t they push for subsidies? Who’s in a position to have both the incentive and the influence to stop them? It’s not as though the Chinese government has ever shown extensive concern about the well-being of the general mass of its citizenry.

  3. Dr X says:

    Maybe this discussion should be reframed as: the Chinese people are being screwed by their elites–giving away their money to Americans. Chinese businesses are like ADM. hmmm. While it may well be true, somehow I don’t think this narrative would gain traction with Americans.

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