6 Reasons Why A Trade War With The Chinese Is Pointless

Authored by Patrick Barron via The Mises Institute,

In a recent post I explained that China's manipulations of its own currency hurt only herself and not her trading partners and, therefore, retaliatory tariffs were not warranted and would be self-defeating anyway. China harms herself by causing her own money supply to expand, which destroys capital through malinvestment and causes prices to rise domestically. Retaliatory tariffs cause American goods to rise in price, resulting in a recession and generally lower standard of living. Few economists claim otherwise.

It seems that everyone is in favor of free trade, as long as it is the other guy who must compete with foreign products. When it comes to their own products, the most typical response from American manufacturers begins with the caveat that "although free trade is beneficial most of the time, it causes harm under certain circumstances." There follows a convoluted chain of cause-and-effect purporting to prove that lower priced foreign goods would hollow out America's key manufacturing industries and turn America into a second class nation.

The purpose of this brief response is to counter these claims and explain why understanding economic theory is vital to the argument in favor of free trade.

There are two books which address the fact that we cannot experiment with an economy the way that physical scientists do. We must use logic to form irrefutable conclusions of what MUST happen, even if we cannot see it! The first is Frederic Bastiat's early nineteenth century classic That Which Is Seen, and That Which Is Not Seen . Henry Hazlitt's updated the book a hundred years later in order to appeal to modern readers. His Economics in One Lesson employs a series of short stories to illustrate that one must always consider the economic effects of an intervention on all and not just a few actors, plus, that one must look to the long term effects of an intervention and not just the short term effects.

So, let's use logic to consider the effects of China's economic interventions on itself and its trading partners who do nothing to retaliate against China in any way.

1. China uses its capital in an inefficient way. Outright subsidies to any industry must be paid by someone. The very fact that China believes that it cannot compete in certain industries to its own satisfaction without subsidies is an admission that these industries are inefficient. Therefore, Chinese internal subsidies are transfers of capital from more efficient industries to less efficient industries. Put another way, if the targeted industries already were very efficient, more capital would flow to these industries and subsidies wouldn't be necessary.

2. Monetary expansion to fund an industry causes overall higher prices and malinvestmentThis is the classic Austrian Business Cycle Theory. China may very well expand its steel industry, for example, with monetary expansion, but such action will disrupt the time structure of production and result in a higher price level and a recession. Other factors of production that feed the Chinese steel industry will rise in price, necessitating another round of currency expansion, which will lead to even higher prices and another recession. It's a vicious cycle that can end only with an end to currency expansion.

3. China's overall economy will be less developed, weakening the impact of subsidies to targeted industriesBecause capital is stripped from more efficient industries, China's ancillary industries will be less developed, harming the targeted steel industry indirectly. Public infrastructure may be less than it would be otherwise, for example. The many business-to-business goods and services that feed the steel industry will lack the capital to expand. The workforce may lack adequate education. The list is endless. China's economy will lack coordinated growth, as was so apparent in the moribund economies of the old Soviet bloc. The point is that something must be sacrificed to aid the targeted industry. Of course, this is a classic Bastiat "Not Seen" scenario.

4. American products get cheaper and gain market share. It may be true to some small extent that the steel industry, for example, may not be able to expand and may even contract in the face of equal quality Chinese steel that can be purchased at lower prices. But all the many American manufacturing firms that USE steel will have a lower cost of production and, therefore, will be able to expand their markets. Again, something has to give; i.e., the Chinese may be able to sell more steel to American manufacturers, but these manufacturers can sell more finished goods into the world market.

5. American industries benefit from the general expansion of all levels of production. This is a corollary to number three above but opposite. Because the companies that use cheaper Chinese steel reduce their costs, passing along the savings to customers in the form of lower prices, passing along the increased profits in the form of dividends to shareholder, increased investment in their own firms, or a combination of above. The reason for this beneficial prospect is that America becomes more capital intensive, and that capital came in the form of a gift from China.

6. Chinese subsidies actually become subsidies to Americans' standard of living. The purpose of production is consumption. Although we may give lip service to how much we love our jobs, what we really mean is that we are satisfied with the life style that we can obtain through meaningful labor. I truly doubt that many of us would work if we were not paid. Chinese subsidies allow us the option to work less for the same standard of living or work as long yet enjoy a higher standard of living because our pay goes further. We workers have more options. For example, as we become richer through Chinese subsidies, mothers may opt for part time work instead of a full time job, or they may leave the workforce altogether. Fathers may decide to pursue lower paid but less stressful careers. Let us not forget that leisure is a valuable good in and of itself.

Conclusion

Finally, the idea that all subsidies can be eliminated worldwide and businesses can compete on a level playing field is a foolish idea. What is the definition of a subsidy? Is it government provided healthcare? How about a state or municipality forgiving business taxes in order to entice industries to expand or relocate? If the government builds a super highway near a plant, is this a subsidy? Likewise, industries in many developed economies decry the fact that undeveloped countries have lower environmental standards, worker safety requirements, and worker rights. Periodically one reads that the European Union is threatening a member for having taxes that are too low and, thus, provide an indirect subsidy.

Capitalists must accept all of these interventions by foreign governments as part of the unknown and uncontrollable factors of conducting business and not lobby their own governments to take self defeating economic reprisals. Unilateral free trade is the best and only real option.

Comments

Stuck on Zero 1982xls Fri, 07/20/2018 - 20:26 Permalink

This is another Mises trash piece about trade. Let the Author explain how the US should respond when China is willing to kill a hundred million of its own people to gain a trade advantage. Let the Author explain how bankrupting thousands of US companies and putting tens of millions of Americans on the dole with huge social costs is a good deal.

In reply to by 1982xls

Dickweed Wang Stuck on Zero Fri, 07/20/2018 - 21:32 Permalink

Most people in the USA have the idea that the trade deficit with China involves mostly manufactured goods, clothes, electronics and stuff like that. It's actually much worse than that. If you go in any major supermarket and look at the packages you will find that almost all of the seafood is imported from China. When I saw that my immediate reaction was 'Don't we have a seafood industry in the US'?  Why the FUCK are we importing seafood from China??

In reply to by Stuck on Zero

Canadian Gal CashMcCall Sat, 07/21/2018 - 12:16 Permalink

Nope Cash, they don't read but maybe they will start as they begin to understand some truths.  I will attempt to expand on what you said above.  The US calculates those squid coming back to the US as an "import" instead of what it actually is, a "re-import", whereby you only calculate the value that has been added to your own goods as they come back into the country, not the entire value of the good.  That's how nearly all countries do it, with the exception of the US.  It's part of what causes US trade figures to look like the US runs much higher deficits than they really do. 

Another example closer to home that explains some of the issues Nafta is facing....Canada sends tomatoes to the US, they get turned into tomato paste, it's sent back to Canada.  Canada accurately calls this a re-import of their own tomatoes and places a trade value on the labour only that the US added to the product.  Another phrase for this is "value-added".  BUT, on the US side, they log it as an export and include both the labour and the Canadian tomatoes in their export value, and Trump goes, "Ohhh, the deficit is so terrible!"  Yeah, ok, lol.

The US Trade website explains this problem with accounting, however Trump has never publicly mentioned this as he needs to use those skewed figures to take advantage of the ignorance of US people in order to get what he wants....he needs to make them believe their trade deficits are much higher than they really are.  He has to now hope US citizens remain ignorant.  Amusingly, quite awhile back, when one US newspaper source brought the issue up of skewed trade data, Trump called it "fake news".  That prompted someone to ask if the US gov website was also "fake" and Trump skipped over the comment, hoping the issue would die quickly.  That should have caused everyone to run to that website and educate themselves.  I certainly did.

So the question is, how many US people are still ignorant and how many have educated themselves on this issue?  It isn't hard.  All you need to do is go read the more accurately calculated trade figures on the websites of your allies.  Trump is counting on his base not being smart enough to know how to do this or too uneducated to understand the issue, but despite everything, I think as time goes by, he's going to discover he's wrong on that.

In reply to by CashMcCall

BrownCoat CashMcCall Sat, 07/21/2018 - 22:48 Permalink

Let's use a little Occam's Razor. If trade does not benefit the people working in the US economy, then trade is bad.

Who cares if US companies make profits. The economy "should be" for the humans producing the goods and services. The size and wealth of the US Middle Class has been declining for decades. The globalists may be achieving their wacky objectives, but managed trade and plutocratic controlled economies had hurt the US Middle Class.

In reply to by CashMcCall

Balance-Sheet ah-ooog-ah Fri, 07/20/2018 - 22:47 Permalink

Any Central Bank can keep any asset it wants as a reserve currency or otherwise. Endless trade deficits mean exporting jobs overseas in an era when automation is removing jobs rapidly and the rate of removal is accelerating. If this means that foreign CBs keep higher proportions of other currencies or assets as reserves then that is only to be expected over time. The US has 328M people currently and will have 425 M soon. The Earth will have 10B people and the share of global output generated by the USA will continue to fall. There is NO WAY that the USA can issue that much currency overseas and that is the problem now. We cannot issue 1T USD per year in the form of trade deficits and 40 years of steady deficits has extended the system to its limits.

In reply to by ah-ooog-ah

Captain Nemo d… Fri, 07/20/2018 - 18:36 Permalink

Austrian Business Cycle Theory

The theory part is always the problem. By the time all that is predicted comes to pass, the world has moved on to new ways of messing up those at the short end of the stick.

REMREMREM Fri, 07/20/2018 - 18:41 Permalink

All of these reasons still will cause Americans to lose jobs.  SO what if China doesn't do great by doing these nasty things, we sill lose our damn jobs.  Waist of space  

lester1 Fri, 07/20/2018 - 18:42 Permalink

China has sooo much more to lose in a trade war. If millions of factory workers become unemployed they will riot and overthrow the communist government!

CashMcCall ah-ooog-ah Fri, 07/20/2018 - 22:40 Permalink

Globalists? Who is the biggest globalist? It is the bunch that controls the Reserve Currency and has 800 Military bases worldwide to enforce their rules or you are sanctioned, threatened or assassinated. It manipulates its currency to assure cheap foreign products and export its inflation. 

Free Trade? You don't define anything. That the mark of the intellectual bottom rung... the TrumpTard, scouring the landscape for a scapegoat. 

In reply to by ah-ooog-ah

Wild Bill Steamcock RedBaron616 Fri, 07/20/2018 - 21:43 Permalink

Yes, we were shamefully complicit.  But the only viable alternative I can see is/was revolution- in some form or another. 

Is voting going to do anything? Pppffffffttt!  Look at how many congressmen have been in DC more than a quarter century.  Too many.  You need willing, viable candidates, and those are in massively short supply, and even then, no guarantees of winning (e.g. Bernie "I roll over and take it hard" Sanders.)

Protests? Nah...protests don't change shit. Write stern letters? 

We the people need to stand up, grow a spine, pull out our gonads and to quote Howard Beale, well hell.  Best to hear it straight from the source: https://www.youtube.com/watch?v=WINDtlPXmmE

                             Peter Finch was goddamned electrifying, fantastic, no superlatives can do his performance justice

In reply to by RedBaron616

tripletail Fri, 07/20/2018 - 18:53 Permalink

The author seems not to understand the obvious - free trade hasn't existed for so long it's impossible to assign a date to when it did. The only trade that has existed for the past 100+ years is carefully managed international trade by the usual suspects. Get a clue!

BrownCoat tripletail Sat, 07/21/2018 - 22:28 Permalink

The focus on price ignores other factors, like Chinese rules requiring Chinese ownership of foreign businesses and forced technology transfers.

The primary purpose of the Chinese economy is NOT to benefit the Chinese consumer. Everything in China, including the economy, is intended to create power for "the state."

In reply to by tripletail

JibjeResearch Fri, 07/20/2018 - 19:10 Permalink

It's not pointless to get into a trade war!

Right now, it's plain dumb to do so because China has most things in places.

Before any battle, prepare a win First!  China planned it; thus, will win the trade war for the next 2 to 5 years.

The US MIGA's planning skill doesn't exist.  Throwing money on DoD will not help.

Jedclampetisdead Fri, 07/20/2018 - 19:15 Permalink

Hate to denigrate  somebody,  but you're a fucking moron, low iq, author of this bullshit. 

 

Here is a few thoughts to think about, you sub 60, moron.

1, child labor laws

2. Environmental laws

3. Currency manipulation.

 

You fuctard moron 

Yen Cross Fri, 07/20/2018 - 19:21 Permalink

  Traditionally, the Chinese have used tactics that slowly wear their adversaries down over time. In this particular situation "time" is not on the PBoC side.

  China has adopted western debt principles and practices, thereby forcing the PBoC to react in a more aggressive manor, for fear of internal unrest from it's repressed populace.

  This is why the PBoC is using stealth intervention, and also why the U.S. must continue to put pressure on the Chinese govt. Global demand is slowing, with or without PBoC intervention. Additional "good" money chasing after "bad" money will only deepen internal fiscal issues for China.

  Tyler posted an interesting chart earlier. It showed the divergence in yuan selling, with treasury futures. That chart tells me that China is using derivatives as opposed to tangible financial instruments to devalue the yuan. [still buying $usd, without actually holding the Treasury paper]

  The Chinese realize Treasuries are going to move higher in yield, and lose coupon value over the medium term at least. The Chinese also realize the global growth cycle is coming to an end. This is the time to hit the Chinese hard, and put maximum pressure on them. China will begin to bend when internal issues become unbearable.

CashMcCall Yen Cross Fri, 07/20/2018 - 22:31 Permalink

China is not devaluing the Yuan. The Yuan is down 6% and follows inversely with the US high dollar policy along with every currency in the trading world. At present, there are 12 emerging market currencies that are at multi-year lows due to the nosebleed dollar. Why did the dollar rise? Trump stirs constant geological turmoil. Speculators buy dollars, liquidity dries up and US exports shut down. 

In fact, two weeks ago China Central bank was buying Yuan in order to bolster the currency. These discussions that accuse China of devaluing are false. Trump is devaluing all other currencies when he applies Tariffs and stirs geopolitical turmoil. That is only one reason why Tariffs always fail. The application causes the other currency to devalue so it effectively eviscerates the tariff. 

On the other hand, if you are the RESERVE CURRENCY and others apply Tariffs against you, those tariffs end up costing you more because your currency is going nosebleed. You lose your foreign discount and can't export your inflation. 

Global growth cycle is in its infancy. All of Asia is coming alive with consumerism. Clearly, you have never been to Asia. If you want to see slow death, travel to the Southern States in the USA and rural areas. Then go to the rust belt and you will see slow dying. That is not the way ASIA feels. 

In reply to by Yen Cross

Canadian Gal Yen Cross Sat, 07/21/2018 - 13:33 Permalink

China was accused in the recent past by Trump of "devaluing" the yuan and it was proven they were doing the exact opposite...they were supporting it as it fell.  They've also supported it recently.  Trump caused the rise in the dollar and fall in other currencies so he needs to stop whining about it because it's not going to reverse unless he does. 

Isn't it ironic that as more and more tariffs are applied, forcing the USD higher and foreign currencies lower, prices of US products will rise and cause exports to fall.  Trump attempted to talk the dollar down, but that will only work for a short time.  Normally, when the USD is high, it's the US consumer who benefits as they are able to go out in the world with their dollars and buy the best bargains, but this time, while the USD is high, whatever you buy will be tariffed so you won't see those bargains and the US gov will pocket what consumers would have saved....the government will make billions off you.  

In Canada where I live, I monitor the store shelves of national chains to see how prices are changing, and what is totally amusing is that due to lack of sales of US products, fire sales have already started.  Let's use soup out of the US as an example.  Three weeks ago, I was shocked to see the "regular" prices had fallen by 15 to 30% (to prices we used to pay in the 90's).  In the last couple weeks they are now having "sales" on some of those same products, reducing them to 1980's prices and they still aren't moving.  I think the issue is some stores purchase goods a year in advance based on past sales, they are looking at "best before" dates of the stuff in their warehouses and realizing as the boycott of US products increases, they're going to need to get rid of US products at cost or below cost to clear them out before they expire.

In reply to by Yen Cross

DEMIZEN Fri, 07/20/2018 - 19:24 Permalink

We would have to derive income from tariff advantage that offset the direct tariff fallout to break "indifferent" even. We do not because the regulation is in the way to any expansion, so we are incorporating in Switzerland.

People and brokers that hold fang will probably absorb most of the global retaliation. every fucking thing is a triple hedged bubble, limited room to play left.

Balance-Sheet Fri, 07/20/2018 - 19:28 Permalink

The US and China have balanced payments between each other- that is step one. This is a very very easy idea and completely practical. China can choose to buy 500B more or China can choose to send 500B less. That is it.

Start to pound a hardwood stake into Patrick Barron's chest and see if he doesn't change his mind. These human weeds are always insisting that NOTHING can be dome about anything- stuff just happens and whatever happens it was beyond anyone's control and just has to be accepted. This weed could be the next mayor of Chicago.