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In Respectful Disagreement With Alex Salter

In my latest column for AIER, I respectfully disagree with GMU Econ alum Alex Salter’s case for U.S. commercial disengagement from China. A slice:

First: A US government that tomorrow will rashly wage war to protect commercial interests is a US government that today likely lacks the wisdom necessary to surgically sever, without unleashing significant unintended consequences, the economic ties that bind Americans to the Chinese. It’s difficult to understand why the same government that would wage war to prevent a harmful severing of productive commercial ties with foreign countries outside of China should be summoned to calmly engineer a severing of productive commercial ties with China – a severing that would also inflict significant economic harm on US households and businesses.

Second: How, exactly, could Beijing “use its power to build a commercial bloc that rewards vassal states and muscles out the US?” While he’s unclear, Alex doesn’t seem to have in mind any military takeover or oppression by China of these vassal states.

So short of military oppression, what might China do? One possibility is that Beijing will subsidize Chinese exports to these vassal states, thereby squeezing out some US exporters. But all such subsidies will simultaneously make China (and Beijing) poorer as they enrich the vassal states. As the vassal states grow richer, their denizens’ demands for US-made goods and services will grow, as will their ability to supply global markets – including the American – with their own exports of inputs as well as of consumer goods.

And the more Beijing subsidizes Chinese exports to vassal states, the richer these countries become at China’s expense.

Alternatively, or in addition, Beijing might subsidize purchases by Chinese households and businesses of imports from these vassal states. By causing the prices of these goods to rise, such subsidies will artificially raise Americans’ costs of importing some goods from these countries, thus obliging us Americans either to produce these goods ourselves or to import them from elsewhere. The consequences for us will certainly be costly, but they’re unlikely to be any more “devastating” than are the tariffs that we often impose on ourselves. Nor would these consequences be more devastating than those that we’d suffer now if the economic disengagement from China that Alex advocates is achieved.

Further, as with subsidized Chinese exports to vassal states, Beijing’s subsidized purchases of imports from vassal states will make China poorer as they enrich the vassal states. Vassal-state industries that artificially expand because of such subsidies might well increase their demands for American-made inputs. More generally, the additional resources that Beijing pumps into the vassal states in the form of these subsidies will, by enriching the denizens of the vassal states, enable them over time to increase both their imports from, and exports to, America.

In summary, nothing short of military oppression by China against the “vassal states” would artificially “muscle out” us Americans from trading extensively with these other countries.

Nothing is guaranteed. Easily imagined are scenarios in which prudent and far-sighted action by the US government today thwarts Beijing’s dastardly plans and, at reasonable cost, avoids a shooting war that would have otherwise erupted. But the language used to describe such scenarios usually hides more than it reveals. It’s easy to write a frightening phrase such as “If China achieves regional hegemony, it could use its power to build a commercial bloc that rewards vassal states and muscles out the US.” Much more difficult is the task of tracing out all the detailed actions and reactions that must occur in order for this fright to be justified.

Despite the gaudy pomp with which they surround themselves, Chinese rulers are just as economically ignorant, politically motivated, and error-prone as are American officials. Indeed, because Chinese society is more closed than ours and its government more autocratic, Beijing officials are likely even worse on these fronts than are American officials. President Xi and his henchmen have no miracle recipe for achieving the impossible – here, using centralized power to create wealth and to economically tie other countries to China in ways destined to harm Americans while simultaneously enriching the denizens of China and of these other countries. Taking due account of these realities preserves, I think, the presumption in favor of free trade.

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