Protectionism Makes People Poorer. Period.

by Don Boudreaux on February 18, 2010

in Monetary Policy, Myths and Fallacies, Trade

Here’s a letter that I sent yesterday to the Wall Street Journal:

Uncle Sam argues that China unjustly gains economic benefits by keeping the yuan undervalued (“U.S. Expected to Press China on Yuan,” Feb. 17).  Bad argument.

When I was a boy, my school held fund-raising fairs.  Using dollars, my classmates and I purchased as many fair ‘tickets’ as we wanted.  We then used these tickets to buy whatever foods and toys were sold at the fair.  Of course, some items cost more tickets than other items.  Each ticket, though, exchanged for a fixed number of dollars.

Suppose my school had undervalued its fair tickets – that is, suppose it gave too many tickets in exchange for each dollar.  (Or, put differently, suppose my school had demanded in return for each fair ticket too few dollars.)  Who’d be harmed?  The answer is my school.  By undervaluing its tickets, my school would have sold its fair items at prices below cost.  Its revenue at the end of the day would have been lower than its costs.  Rather than raising money, my school would have lost money – and we students would have been made wealthier as a result!

The same holds true for China.  If the yuan is undervalued, you can be sure that this policy drains wealth from China rather than builds wealth there – and makes Americans richer in the process.

Donald J. Boudreaux

Here’s the foundational point.  Beijing makes the vast majority of Chinese people poorer whenever it subsidizes consumption – especially consumption by Americans and other non-Chinese.  As per this earlier post, if Beijing subsidizes this consumption only a wee bit, it makes the Chinese people only a wee bit poorer than they would be without the consumption subsidy.  If Beijing subsidizes consumption more heavily, it makes the Chinese people even poorer.  And if it subsidizes consumption massively — such as would be true if it arranged for the yuan to be sold on foreign-exchange markets at a price of $0 — it would make the Chinese people massively poorer.


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