Here’s an email to the great Claremont Graduate University economist Tom Willett.
Tom:
I’m glad to learn from your kind email that you agree with my assessment that the economic interventions of President Xi and his henchmen won’t improve China’s economy. (If ever I find myself in disagreement with you, I’ve almost certainly messed up.) You might, nevertheless, be correct that, as you say, “Xi has turned out to be a much better bargainer than deal maker Trump.” But it’s unclear that this reality generally works to Americans’ disadvantage – or to China’s advantage.
One of the most bizarre features of the often topsy-turvy world of international-trade negotiations is that each government holds the well-being of its own citizens hostage as it bargains with other governments to pressure them to improve the well-being of their – the other governments’ – citizens.
To pressure Beijing to allow the Chinese people to enjoy greater access to inexpensive imports from America, the U.S. government threatens to prevent Americans from enjoying greater access to inexpensive imports from China. Beijing says the like to the U.S. government.
“I’ll not allow my citizens to raise their living standards,” each government effectively tells the other, “unless you allow your citizens to raise their living standards!”
“Damn you!” each government then retorts. “Okay, I’ll make the sacrifice of allowing my citizens to raise their living standards if you agree to make the sacrifice of allowing your citizens to raise their living standards.” In such negotiations, Trump is unaware that the people he’s putting first are not Americans, but the Chinese. Fortunately, Xi – equally unaware – is willing to sacrifice the well-being of the Chinese people in order to pressure Trump to improve the well-being of Americans by lowering U.S. tariffs.
At work here is a whacky invisible hand waved into motion by mercantilist fallacies. Each government’s desire to increase its country’s exports leads it to bow to the other government’s demand that it lower its import barriers. What each government reckons to be a benefit (more exports) is really a cost, and what each government reckons to be a cost (more imports) is really a benefit. Fortunately, this whacky invisible hand typically does manage to keep tariffs lower than they would otherwise be, to the benefit of the people of both countries.
Like our revered teacher Leland Yeager, you know all this, of course. I just had to spell it out in order to vent my spleen at the idiocy of it all.
All the best,
Don
