Against Trade War

I’m a huge fan of Robert Samuelson’s long repeated harping on the coming Medicare train wreck – tell it brother! But I much oppose his war-mongering:

No one familiar with the Smoot-Hawley tariff of 1930 should relish the prospect of a trade war with China — but that seems to be where we’re headed and probably should be where we are headed. Although the Smoot-Hawley tariff did not cause the Great Depression, it contributed to its severity by provoking widespread retaliation. Confronting China’s export subsidies risks a similar tit-for-tat cycle at a time when the global economic recovery is weak. This is a risk, unfortunately, we need to take. …

The trouble is that China has never genuinely accepted the basic rules governing the world economy. … China’s worst abuse involves its undervalued currency and its promotion of export-led economic growth. …. China’s underpricing of exports and overpricing of imports hurt most trading nations. … One remedy would be for China to revalue its currency, reducing the competitiveness of its exports. … [Some say] a revaluation of 20 percent would create 300,000 to 700,000 U.S. jobs over two to three years. …

If China won’t revalue, the alternative is retaliation. This might start a trade war, because China might respond in kind. … More realistic would be a replay of Smoot-Hawley, just when the wobbly world economy doesn’t need a fight between its two largest members. Economic nationalism, once unleashed here and there, might prove hard to control. But there’s a big difference between then and now. Smoot-Hawley was blatantly protectionist. Dozens of tariffs increased; many countries retaliated. By contrast, American action today would aim at curbing Chinese protectionism. (more)

Relative currency values set relative prices. China’s current currency level now sets low prices for the stuff it sells to others, and high prices for the stuff it buys from others. You might dislike this if you compete with China to sell stuff, but you should mostly love it if you buy stuff from China, or compete with them to buy stuff.  Often you should love it if you sell stuff to China. Low China prices do not obviously hurt the non-Chinese overall.

Fear of being outcompeted in selling stuff is a terrible reason to start a war! If someone is outcompeting you in selling stuff, well either step up your game or step aside. That is how supply and demand should work. We want a system where stuff is produced by the lowest cost suppliers and goes to the buyers who value it the most. If some supplier offers to sell stuff to folks at a lower price, well then we want folks to switch to buying from that supplier. If a supplier offers an unsustainably low price, it will soon go broke and buyers will switch away.

This logic applies just as well to distant nations as it does to a convenience store down the street.  Don’t be fooled into treating China differently because you were built to fear foreigners.  Wars are not needed or wanted as part of our supply and demand adjustment process!

GD Star Rating
Tagged as: , , ,
Trackback URL: