Believing that Beijing’s mercantilist trade practices reduce the prices we Americans pay for Chinese goods, Washington Post columnist Robert Samuelson asserts that “To do nothing about China’s trade policies is to encourage more of the same.”
Why, pray tell, should we not welcome “more of the same”? What’s wrong with the Chinese offering to sell us more goods at lower prices?
Samuelson would likely respond by noting that Beijing’s policies harm American producers. But this response fails. First, American producers would be no less harmed if the falling prices of Chinese goods resulted exclusively from improved market efficiencies – efficiencies that Samuelson would reject as a justification for U.S. protectionism.
Second, Samuelson forgets Adam Smith’s insight that “Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to only so far as it may be necessary for promoting that of the consumer.” Denying American consumers the opportunity to benefit from Beijing’s foolish trade policies is to attend to the interest of the producer in a way that harms, rather than promotes, that of the consumer.
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Suppose you had a neighbor that had two trillion dollars but does not want to spend it on the goods and services your house offers. Think of all the benefits that your family members get but forget that your house has to borrow money for transfer payments to your unemployed family members. Try and imagine the wonders you receive from this neighbor and don’t think about the foolish neighbor accumulating more and more trillions because obviously this infallible logic.
I have to be facetious because of the absurdity, I know that this comment won’t get much run support here but something to think about.
Your neighbor got the two trillion dollars by surrendering two trillion dollars worth of goods to many of your other neighbors. In the end, your neighbor would be stupid for holding onto those dollars. So, he’ll either have to purchase goods from you or your neighbors or he’ll put the cash to work by purchasing property, equities, or bonds.Just asking but aren’t the unemployed members of your own family the true foolish ones? Why is it that they cannot cope and find a productive use for their scarce time?
My neighbor is using his two tillion of reserve currency (modern equivelant of gold bullion) to buy raw materials and demand a return on his bounty.
If by “dollars” you mean the things that I print up at will, the only things my neighbor can do with them are (a) trade them back to me in exchange for something, (b) invest them in my productive capacity, or (c) trade or invest with someone who will then do (a) or (b).
Even if my neighbor hordes them, it drives up the value of the dollars held by my unemployed family members. Even if he destroys them, I can simply print up more and dole them out however I deem necessary to benefit my family members.
Could you explain what the problem with his having the dollars is?
The very root of mercantilism is worrying about the pieces of paper and ignoring the point of having the pieces of paper, which is having actual things of value.
The dollar is the reserve currency for the world’s trading system or the gold bullion of the modern age. There is a weak argument that these are pieces of paper (U.S. Dollars) but it is what is used for buying things and services all over the world. Dollars are not etheral, they are powerful, but for the U.S. citizen the people’s money is losing its value because of the massive debt that has to be paid back for holders of U.s. debt.
That is an argument against government fiscal deficits, not trade deficits, a.k.a. investment surpluses.
Don, I always enjoy your hearty defenses of free trade. But there’s something I wish I understood better.
Don’t we require a thriving productive sector in order to produce high levels of employment and high levels of human capital (skill)?
In a free-trading world, are there enough jobs here at home for us to maintain or improve our lifestyle? Or is there some equilibrium consumption level under free trade which is optimal? Is such a level better or worse than we have now? What is the endgame?
Josh – I won’t pretend to substitute for Don. But, I thought I would share the example that made this clear for me.
I think the short answer is that we’ll find things to do.
I understood that short answer when I learned about the progression of agriculture in the U.S. I can’t do the numbers justice, but something like 80% of citizens 200 years ago worked to produce enough food for everyone. Now it’s something like 3%. And those 3% can produce enough food for us and others.
77% of the population found other things to do. They became professors, inventors, software developers, doctors, grocery store owners, jet fighter pilots, nuclear bomb builders and so on.
By putting tariffs on tires from China we are preventing resources from being directed correctly. All else equal, if price were the only difference between U.S. tires and Chinese tires then we should be buying Chinese tires. This will allow U.S. consumers to spend less on tires, and more on other things. This will cause labor and capital to leave the U.S. tire industry and instead flow into other industries, perhaps new industries we don’t even know about yet. The high wages the Steelworkers Union has guaranteed the U.S. tire makers (by lobbying, and successfully getting this tariff) will continue to lure in future labor. That future labor would have gone into other industries (some maybe not yet invented).The argument is tantamount to Hazlit’s “Fallacy of the Machine”. When the machine that makes needles was made it must have put tons and tons of workers out of work. Now one man armed with one machine could do the work of what previously took a thousand men (example #’s). Well, in the short term these men were hurt. They had to retrain, they had to build new skillsets, maybe even some were too old and unable to learn new things. In the medium & long term, this innovation benefits everybody. Now productivity is much higher and needles are cheaper, now we don’t need so many people working on needles and they are free to go and do other work making god-knows-what. Perhaps that old guy’s grandson, that one who lost his job and never could get retrained, maybe he is a software engineer now because society doesn’t need such a great amount of needle makers anymore. Future generations all gain from innovation and decreased costs/increased productivity.Read: THE CHOICE by Russ Roberts for similar examples
edit: whoops, meant to be reply to Josh
Thanks Seth and Joenorton. I’m not in denial about our obvious improvement of lifestyle, or about the benefits of increases in productivity.
My concern is that I don’t fully understand the evidence that “we’ll find things to do”. History isn’t evidence.
To put the problem another way, so long as resources and goods remain scarce, people must be able to exchange something for them (unless we return to distribution by force or fiat). That something must have value. With the exception of arbitrage or rent-seeking, it’s hard to acquire things which have value by means other than labor. It is easy to imagine a level of productivity such that the labor of most individuals is of insufficient value in any feasible quantity to cover the cost of even basic goods.
Is such imagining false? Is there an inflection point where, given certain variables, high levels of productivity drive quality of life downwards for many people or for everyone? Surely there is literature dealing with this subject, and I’m not familiar with it.
“It is easy to imagine a level of productivity such that the labor of most individuals is of insufficient value in any feasible quantity to cover the cost of even basic goods.”
I’ve thought about the future as well but I see a different trend, in fact – the opposite. I see a future where less work, not more, is required for humans to exist comfortably. As productivity increases we see the cost of essential goods decreasing. I believe that the trend shows that it is less expensive for people to exist today than it was in the past. (Note: In real wages, not nominal wages) What portion of a full work week did it use to cost for a man to live? At one point in time it took 100% of your available work hours to scavenge and hunt, and since those hunter/gatherer days we see where it requires less and less of our available work hours in order to get by – and more and more goes into ‘luxuries’ (things like air conditioning, large dwellings, fine clothing, expensive exotic foods, etc.) and leisure. I think this is still the trend in effect.
If I’m interpreting your questions right, are you asking if we will always have jobs? Do comparative advantage & division of labor not show you that we will always have work available for people to specialize in? Also, opportunity cost comes into effect.
The reason the doctor doesn’t wash his car (even though in college he worked as a car washer and became an expert) but instead hires someone else — who is not as good at carwashing as he — to wash the car, is because his opportunity cost makes his time so much more valuable if spent in surgery. This doctor’s opportunity cost then makes the carwasher’s time/labor more valuable as well, up until marginal benefits = marginal cost.
Hopefully I answered your question Josh, if not please rephrase and I’ll be happy to take another crack at it.
Thank you Joenorton. I too see the trend that increases in productivity allow us to work less to achieve a higher standard of living. I certainly do not think this is a zero-sum game of any kind. Perhaps it helps if I put it this way: my concern is more about whether this will hold true at all scales.
For example, is there a point at which for practical purposes we’ve reached maximum consumption capacity? Or a point at which marginal human labor is simply less efficient than marginal processes cooked up by autonomous servant machines on our behalf?
It does not seem obvious to me that comparative advantage and division of labor will always provide sufficient opportunities. What if machines are so efficient that there is very little value to unskilled labor which is consequently in low demand. What if the only really valuable labor requires skills that are beyond human capacity (some would say we are already testing this line, with many of the people paid lots of money and prestige to wrestle with complicated problems being soundly and iredeemably out of their depth)?
I’m not suggesting you should answer this random list of what-ifs, which I’ve deliberately cast in sci fi terms to get “out of the box” a little. But I’m interested in what developments or existing problems throw a wrench in the idea that free trade and increased productivity *always* produce positive outcomes for those traders whao are free and increasingly productive.
I’m also inclined to take Seekingexports point seriously. Unfunded consumption is not an unmarred good thing. And how do you fund consumption? Would it have to be trade? We needn’t expect to export tires when it is so much cheaper to import them from China. But we must be able to export *something*. Trade deficits being measured in dollars, not in numbers of tires, it seems valid to be concerned about how to correct long-term trade deficits. Perhaps a trade deficit is a fairly real-world indicator of low comparative advantage.
Interesting. It’s like you are not seeing the substantial increses in our standars of living ever since we began running trade deficits.
Interesting. It’s like you are not seeing the massive debt that the U.S. government has incurred. You are also not seeing the personal debt that has been rolled up. Combine this with high unemployment and the deleveraging for this higher standard of living is a real burden for this economy.
You are not seeing the fact that you’re the one conflating two separate ideas in that post of yours — four if you count the standard of living and unemployment issues you raise.
If we make fewer of good A, that doesn’t mean that our production of goods B through infinity is going to stay the same. People who would have produced A will choose something else to make. If mana fell from the sky we may not have to farm or cook anymore, but we would use that time to do other stuff. It’s not a zero-sum game.
Here we go again. The first argument is like saying: Writers are no more or less harmed if they cannot publish because of censorship than if they cannot publish because a lot of better writers start submitting material. The second argument (Don’t worry about producers, only about consumers) is like saying: Don’t worry about what the Inquisition does to Galileo, as long as we have astronomy books that teach heliocentrism. That is (a) unjust; and (b) short-sighted.
rdonway,
In your first analogy, are the writers analogous to tire makers? If they are, then you are missing what I think is the main point of the argument: that unobstructed free trade would be beneficial to all. Concentrating on the tire makers alone seems to be a restrictive view.
David
Fortinbras,
I know that Mr. Boudreaux wishes all the world engaged in free trade; so do I. I am merely critiquing his argument here.
Mr. Boudreaux argues that American producers are no more harmed by China’s mercantilist policies (tax-subsidized exports) than they would be if Chinese producers were simply more efficient. My libertarian reply is (using writers as example): The harm a producer suffers as the result of coercion (censorship, tax-subsidies) is qualitatively different from the harm he suffers as the result of superior competition. I should have thought this was a point libertarians could agree upon: Market situations that result from coercive intervention are qualitatively different from situations that, although they may appear similar, result from free market forces.
Two wrongs don’t make something something.
In the case of trade, two wrongs are most definitely worse than one wrong. Should we wish unilateral free trade for the Chinese, as we wish it for Americans? Of course! But let’s see if we can get it even for Americans before we try to get it for denizens of other dominions.
Nothing I said addressed the question of what a party injured by coercion should try to do in response to that coercion. I am still working on the (apparently endless) task of getting libertarians to admit that the introduction of coercion into markets (via coercively produced goods) is a bad thing and the source of legitimate concern, rather than (as Milton and Rose Friedman suggested) a cause for celebration.
Tit-for-tat works. It’s used in collective and individual bargaining all the time. There’s no reason it can’t work for nation-states, too.
where is the ‘coercion’ in the chinese tires?. the tariff ,otoh,does seem to be coercion. censorship by a foreign country?.what you gonna do.censor your own countrymen?.
If a person uses slave labor to produce goods, and then sells those goods in an otherwise free market, he is introducing coercion into that market and thereby distorting it from what it would be under conditions of freedom. If other people use of force to prevent the slaver from introducing his slave-made goods that is no more coercion (aggression), then the use of force to block a robber from robbing is coercion (aggression).
The use of coercively extracted money (taxes) has the same effect as the use of slave labor.
rdonway, I agree.
Quite so. Adam Smith was merely stating the obvious: it’s people that matter. (More than institutions, businesses, nations, the hereafter…)
Producers are people.
Producers are consumers.
Consumers are harmed, too. They are those consumers that produce the good subsidized by the foreign government. Foreign subsidies cause harm to actors in the domestic economy. Don’s argument is still wrong.
I’ve just discovered this site (a good one! thanks), so excuse me for asking:
Has anyone else remarked the curious similarity between the Chinese surplus / enormous holdings of US T-bills and the Nigerian 419 scam?
If the Chinese start giving stuff away to Americans for free, the “good” US government should stop this “predatory trade” and protect US jobs!
And, hell, who needs to work when the free stuff is being sent?
If, for someone, work itself is what they desire – nobody is stopping them from doing just that.
Bravo, Prof. B.I would just add that producers are also consumers, so low consumer prices are as good for producers as they are for consumers.It is unfortunate for Chinese citizens that their government is transferring their wealth into the hands of US consumers and producers, but the best way to teach them to stop (if that’s what people here want), is to let them experience the folly of that practice.
The first argument fails. Any number of interventionist policies could be justified by the observation that producers would be “be no less harmed” by non-existent “improved market efficiencies.” The awful CAFE standards on US auto makers come to mind.
The second argument works. But it doesn’t change the fact that (1) there is actual harm done to some people, and it can be significant, and it can be lasting; (2) nation-states bargain market access with other states and nothing is going to change that; (3) bargaining can include tit-for-tat strategies to limit the effects of foreign subsidies or to deter them altogether.
I think Mr. Samuelson isn’t completely fair-minded in his analysis of the valuation of the chinese currency. There’s confirmation bias in his conclusion that it is undervalued by so and so much. My gut feeling is that he might be right, but that’s not enough to justify tariffs.However, if tomorrow the Chinese currency freely floats and the 1,3Bn Chinese are allowed to buy as many dollars, euros, yen, etc. as they can afford, I am not so sure whether the yuan actually will go up. And if one sees how the USA and the UK are trying to “solve” their economic problems, namely by printing unimaginable amounts of M1 money and thereby de facto depreciating their currency ( speculating that the Germans will make Europe pick up the tab since they fear hyperinflation so much and they control the ECB), America is in no position to lecture China on un-fair trade policy. They should make the case to China for floating the currency, not raising trade barriers.
Suppose that Manna fell from Heaven. Should we burn it so that it would not harm the economy?
By “we”, are you referring to the UMWA (United Manna Workers of America)?
It is certainly true that consumption is the end and production merely the means of achieving that end. However, in the case of China, our trade deficit is harmful because about half of the dollars we send to China are invested by the Chinese government in US treasury bonds. This causes several problems: First, this buying of US treasury bonds reduces the market interest rate below the natural interest rate which would correspond to the time-preference of the US public, thus leading to malinvestment. Second, this artificially low market interest rate encourages the federal government to take on more debt. And third, this artificially low market interest rate encourages people in the US to take on more consumer debt with which to purchase, among other things, more cheap goods form China, thus perpetuating the cycle. Of course, the cycle must end eventually so that the malinvestments can be purged, market interest rates can return to the natural rate of interest, and the time-preference of the US public can be respected. The crisis we had in 2008 almost brought about the end of this cycle and almost cleansed the system of malinvestment, but the Chinese government, the Federal Reserve, and Treasury did everything in their power to prolong it by continuing to buy treasury bonds, depreciating the US dollar, and nationalizing banks and failing companies. It is unclear whether they have succeeded in prolonging this cylce for the time being, but even if they have, the time of reckoning is fast approaching.
Let’s put it this way: The cost of practices such as dumping to the domestic producer is less than the benefit of such practices to the domestic consumer. But the cost to the foreign denizen is greater than the benefit to the domestic consumer.
So in a world where you treat everyone the same, yes, the US should be upset by coercion in the Chinese market — mainly because of its effect on the people of China. Nonetheless, there is no reason for the US not to take advantage of that subsidy unless, as others have proffered, the coercion becomes egregious in the extreme, a la slavery.
In the short run the Chinese, like the Japanese before them, will reap a disproportional bounty. But as the Japanese learned, bubbles will be created. When subsidized export economies grow faster than domestic economies disequilibrium follows. Pressures on both real estate and manpower will grow, as will pressures abroad. We see in the papers everyday how those pressures manifest themselves . So enjoy the lower prices why you can.
MikeP, You say: “The cost of practices such as dumping to the domestic producer is less than the benefit of such practices to the domestic consumer.” I guess that, as a libertarian, I really doubt that you can calculate that, once you realize that the “cost” (I would say “harm”) is the result of coercion and the “benefit” is bestowed by coercion. Because the “cost” and “benefit” result from coercion, it seems to me that weighing them in utilitarian fashion fundamentally subverts justice. And the social cost of doing that is incalculable.
Gee, slavery is bad, why? Slavery is good because it provides consumers with cheap products and allows the consumer to become more wealthier!
So, naturally we should all clamor to be slaves to those who say they’ll protect us just because the other government is doing it first. But are they? We ‘ve had our own subsidies that are fairly extensive.
I was not speaking dollar costs and dollar benefits, but of the costs of coercion. Coercively produced goods (such as tax-subsidized goods) drive out the kind of producer who operates successfully in a free market, and favor the kind of producer who operates successfully in a political market. That might prove costly in ways not easily calculated. Tax subsidies that oust free-market producers also short-circuit the processes by which capitalism traditionally lowers costs, such as technological innovation. That in turn may subvert the scientific progress of the field’s scientists and engineers. Moreover, coercively produced goods may lower costs to consumers, but they subvert the attitude that one must pay for what one gets and not rely on coercion for it. The harm caused by that attitude is incalculable.
In this post, you’ve expressed yourself well. As a sort of human asset, it is better to have enterprises which succeed via markets rather than via politics or state capture. But given what we’ve done in this country in the past year, it strikes me as odd that a Chinese tarriff would be the example of your point that you’d want to go with.
I would agree, for reasons given, that the harm to the Chinese may be incalculable but for American companies it can only serve to produce the opposite effect. US companies will strive, and innovate even more. The rules needn’t be fair in order to yield a productive outcome.
I am no way concerned with any particular tariff, or any particular age, or any particular country (either as exporter or importer). My only concern is that libertarians should realize that subsidized foreign imports are not a wholly beneficent thing, and probably not a beneficent thing on net.
If libertarianism means anything, surely, it is that one is most unlikely to produce happy outcomes in free markets by introducing one’s preferred mode of coercion.
Again I disagree, the definition of free markets is the open pursuit of personal needs and desires. Happiness need not be a part of the equation. Advertising is coercive, should we agree with Marx that it should be eliminated?
By “happy outcomes,” I meant “economically favorable outcomes.” I was not implying any direct connection to emotional happiness.
One cannot “openly” pursue one’s needs and desires in a market where other people are permitted to use coercion.
If you think advertising is coercive, there is no point in talking. We mean utterly different things by “coercion.”
Economically favorable outcomes implies may entail a zero sum game.