Here’s a letter to the Wall Street Journal – overly long, I know, and I still have much work to do at coming up with a concise crystal clear explanation of comparative advantage.
Tunku Varadarajan’s review of two books on China (“Two Books on China’s Post-Mao Era,” Nov. 25) – including one by Frank Dikötter – would get an A+ rather than an A- were it not marred by the following two sentences, each of which reflects an economic fallacy:
“As Mr. Dikötter explains, thanks to the ability of the Chinese state to manipulate not just the exchange rate but also the means of production – cheap land, labor, raw material and energy to Chinese enterprises – no country inside the WTO can compete with China. Remarkably, many American economists had believed that China’s accession to the WTO would reduce the trade deficit between the U.S. and China.”
The first fallacy is that the Chinese economy can be arranged to ensure that “no country inside the WTO can compete with China.” If this statement were true, not only would China be the only WTO member country to export, no WTO country other than China would produce tradeable goods, as Chinese exports would by now have bankrupted all such producers.
The fact that these outcomes aren’t remotely occurring is no surprise to economists, who recognize the meaninglessness of talking of countries competing against each other economically. Economic competition occurs at the level of particular goods and services, and is carried out by producers specialized in supplying these goods and services. Chrysler competes against Honda at selling automobiles. Amazon competes against Ikea at retailing furniture. Exxon competes against BP at selling refined petroleum products. “America” and “China,” in contrast, are here merely the jurisdictions in which countless individual sellers operate as they – and not the countries in which they operate – economically compete against each other.
Further: No country (or region, or firm, or person) can possibly be more efficient than all other countries (or regions, or firms, or persons) at producing everything. If China becomes more efficient at producing, say, tires, it necessarily becomes less efficient at producing other goods or services. The reason is that as efficiency within China at producing tires increases, the financial returns to the Chinese of producing tires increases. This fact means that with every rise in China’s efficiency at producing tires, China’s cost of producing things other than tires rises – that is, China’s efficiency at producing things other than tires falls.
Finally, in our world of nearly 200 countries there is no reason whatsoever to expect any pair of them – such as the U.S. and China – to have ‘balanced’ trade with each other. Therefore, no competent economist would ever speak of “the trade deficit between the U.S. and China,” for the reality to which this phrase refers is no more economically meaningful than is the phrase “the trade deficit between Don Boudreaux and Amazon.”
Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030