In his State of the Union Address—February 4, 2020—President Trump outlined his reasons for punishing nations that manipulate their economies in order to achieve some internal policy goal, such as China. The president claimed that such manipulation was unfair and harmful to its trading partners. His main concern is that by manipulating its economy China “steals” jobs. It does this in several ways:
By keeping the yuan at a lower exchange rate against other currencies—meaning that the People’s Bank of China gives more yuan for each dollar than would occur in a free currency market—Chinese goods are cheaper in terms of foreign currency than they would be otherwise.
By subsidizing its industries, Chinese goods can be offered at a lower price.
By erecting tariffs against some imported goods, China prevents foreign companies from producing more and employing more people than they would otherwise.
The president claimed that his policies were working, that manufacturing jobs were returning to the US and have created a “Blue Collar Boom,” with unemployment statistics at very low levels for many politically sensitive segments of the labor market.
I agree with the president in his desire that China cease manipulating its economy, but my reasons are not the same as his. More importantly, I would not recommend reciprocal interventions to punish China. Instead, I would follow the Barron maxim of “minding our own business and setting a good example.” I would point out the following consequences of Chinese economic interventions:
China itself pays for the interventions, not its trading partners. In fact, Chinese economic interventions constitute a transfer of wealth from China to its customers overseas. Goods that previously cost X in the US market now cost less than X. Americans pocket the difference, which increases our wealth. The Chinese people pay high taxes or higher prices. China’s subsidies to business distort the Chinese economy away from producing more desirable products. (If this were not the case, there would be no need for subsidies.) Its tariffs on imported goods reduce the supply of them within China, leading to higher prices and/or shortages within China. In other words, Americans and the rest of the world benefit at the expense of the Chinese people.
This is good for Americans, so why should we complain? That Chinese economic interventions are good for Americans is true in the short run, but what about the long run? By intervening in its economy, China weakens its productive capital base. It is this capital base that will pump out the many things that Americans will desire in the future. Anything that weakens a trading partner’s capacity to generate wealth means that its trading partners will be less wealthy too. Therefore, even loyal Americans should advise China to eschew economic manipulations that benefit them in the short run.
No one has ever explained this phenomenon better than Frederic Bastiat in his classic essay “That Which Is Seen, and That Which Is Not Seen.” Henry Hazlitt brought Bastiat’s insights up to date in Economics in One Lesson. There are actually two lessons: the first is that one must consider the consequences of an economic act not only for those who will benefit but also those for who will be harmed. Of course, it is usually easy to point out those who will benefit. It is difficult if not impossible to quantify those who are harmed, especially if the harm constitutes benefits that never occurred but would have absent the intervention. Hazlitt’s second lesson is that one must look not only to the short-term benefit of an economic act but also to its long-term costs. For example, steel import restrictions may result in a boom for the US steel industry with no apparent short-term consequences. But if US steel were already competitive in terms of price, quality, and service, there would be no need for import restrictions. We can conclude through economic logic that steel prices, quality, and/or service will deteriorate with the restrictions in place, harming Americans in the long run.
The president measures economic progress in terms of increase in employment (or decrease in unemployment) rather than an increase in wealth. Laboring more is not necessarily a sign of economic progress. Communist countries, such as the former Soviet Union, had zero unemployment! The state chose a job for everyone. But no one would claim that decades of full employment made the unfortunate citizens of the Soviet Union wealthier. The opposite occurred. In a free market economy without the burden of onerous labor laws, high taxes, and other interventions, there is no barrier to full employment for the simple reason that there is no limit to economic satisfaction. Even a frugal person who desired no additional economic goods certainly would be pleased that he need labor less to achieve and maintain his current level of economic satisfaction.
The greater China’s capital base, the greater the potential for a further expansion of the division of labor to employ this additional capital more productively. We Americans should wish that the entire world were free market capitalist economies so that we would have access to cheaper, better, and more varied products and services. China’s integration into the world economy has benefited Americans tremendously. So, Mr. President, I also want China to end its economic interventions, but I do not want to punish China through tariffs and other means for doing so. Our response should be to declare unilateral free trade. Let’s lead the world by setting a good example and look forward to a world of peace and prosperity.
What causes the seemingly unfounded confidence in socialism we encounter more and more in the news media and among political activists? In the Extinction Rebellion movement, for example, activists are quite certain they have learned that there is an alternative to markets as the means to economic prosperity. It’s a means that does not involve meeting the legitimate needs of one’s fellow men in the marketplace.
It is likely not a coincidence that most people living today have lived most of their lives in a world dominated by fiat money. It has now been nearly fifty years since the United States broke all ties between the dollar and gold. It’s been even longer since other major currencies were tied to gold at all. Consequently we now live in a world where the creation of wealth is seen by many as requiring little more than the creation of more money.
In this kind of world, why not have socialism? If we run out of money, we can always print more.
Unlimited Money Feeds the Myth of Unlimited Real Resources
The world was on a watered down version of a gold standard until 1971 when the US abandoned its solemn promise — the 1944 Bretton Woods Agreement — to back the dollar with gold at $35 per ounce. Gold backing of a currency provided a solid intellectual foundation of reality that few even recognized existed within themselves; (i.e., that we live in a world of scarcity and uncertainty). This reinforced the idea that wealth has to be built. It cannot be conjured out of thin air, just as gold cannot be conjured out of thin air.
But fiat currency can be conjured out of thin air and in enormous amounts. The longer a fiat currency is the coin of the land, the more one is led to believe that nothing should be in short supply, since everything is bought with money and money need not be in short supply. Those who know only unlimited fiat money soon demand free healthcare and free higher education as a right. And why not? Unlimited money will pay for it. Into this never-never land comes demands for scrapping the fossil fuel underpinnings of our modern economy by those who understand nothing of how an economy works. But, apparently one does not need to understand technical limitations, because there are no technical limitations. The “barbarous relic” (gold) had once limited the money supply and thusly seemed to limit the supply of vendible goods. Gold has been replaced by unlimited fiat money. Now it seems that unlimited aggregate demand can be funded by unlimited fiat money, leading to a world of plenty. Designer of the Bretton Woods Agreement Lord Keynes says soin this very insightful short video.
Fiat Money Turns the World Upside Down
The psychological impact of a lifetime within a fiat money economy cannot be underestimated. One’s world is turned upside down. For many, financial success becomes prima facie evidence of exploitation of the masses rather than something to be admired and to which one could aspire also. With more wealth seemingly available at the click of a computer button, only an Ebenezer Scrooge would deny funding the latest demanded government program. If wealth is so easy to create, many conclude only greed and cruelty are what stand between us and far greater prosperity for all.
But that is the very reason that fiat money is so subversive to the social order. In a sound money economy any new spending program can be funded only by an increase in taxes, an increase in debt, or by cutting existing funding. There is a real cost to each of these options. There is a real cost to printing money, too, but the cost is hidden. One does not see malinvestment at the time of money printing. Price increases are delayed and uneven, due to the Cantillon Effect whereby the early receivers of new money are able to purchase goods and services at existing prices. Later receivers or those who do not receive the new money at all suffer higher prices and a reduction in their standard of living. Even then most people do not link higher retail prices with a previous expansion of the money supply.
For the sake of peace and prosperity in the world, the US should take the true leadership role in proving to the world that free trade and non-interventionism are all that is required. In other words, all nations should simply mind their own business and set good examples. Just as laissez faire policies work within a nation’s boundaries, free cooperation between individuals of different nations will quickly reveal which policies work and which do not. It is important to remember that there is nothing that a nation can do internally to force other nations to subsidize its economy. All subsidies, currency manipulations, etc. are self-defeating. Therefore, the US should take the following actions to remove government interference with peaceful, cooperative trade between its citizens and the citizens of other nations.
One: Adopt unilateral free trade.
Completely eliminate all restrictions on the importation and export of legal products. For trade purposes treat the rest of the world as if it were part of one’s own country; i.e., the freedom to buy and sell all legal products anywhere in the world. It is a mercantilist fallacy that a nation becomes wealthy by selling more than it imports, thereby accumulating gold (or, nowadays, a “trade surplus” ). On the contrary, mercantilist nations deny their citizens the right to become wealthy. They do not allow their citizens to exchange the product of their labor for the most goods and services. Rather they deny their citizens a higher standard of living by forcing them to purchase higher priced and/or lower quality domestic goods. If this were not the case — i.e., if a nation could produce all things that it needed at the lowest worldwide price — trade barriers would not be needed, since no one would wish to purchase inferior/higher priced foreign goods. Of course, this is not the case at all. The division of labor is a natural, beneficial process that knows no international, political boundaries. If Hawaii were not a state of the union, but rather a foreign nation under its own political system, would Americans be better off by denying themselves Hawaiian grown pineapples and instead grow inferior pineapples at higher prices somewhere in the remaining forty-nine states? Of course not. Free trade allows for the most efficient allocation of worldwide capital to produce the most goods and services for those who participate.
Two: Do not lobby foreign governments to allow one’s own citizens’ goods into their countries.
A nation that restricts imports harms its own citizens. Allow them to correct their own government’s errors themselves. A nation that denies its citizens the right to import goods from other countries yet encourages its citizens to sell goods into those same countries — and may even subsidize these sales in some way — has adopted an illogical and unsustainable policy. It is similar to selling one’s wares and never cashing the customers’ checks. Foreign exchange accumulates in the protectionist nation’s central bank. But to what end? If that government buys the national debt of the same nation, then the fallacy becomes even more clear. It denies its citizens the right to buy that nation’s goods and services. Yet, when the government itself buys that same nation’s debt it is funding that nation’s spending — infrastructure, defense, etc. — with the fruit of its own citizens’ toil. Nothing could be more illogical, and this policy will be abandoned eventually or the protectionist nation will fail economically.
Three: Do not prevent one’s own citizens from buying so-called subsidized or “dumped” products.
This oft-used policy is a consequence of mercantilism. Nation A prevents its citizens from buying products that it claims nation B subsidizes in some way. The US/Canadian softwood dispute is a good example. The reciprocal tariffs that emanated from this dispute have caused Americans to pay more for softwoods, reducing their standard of living. The “seen” consequence is that American softwood producers get higher prices for their product, but at the “unseen” expense of their fellow countrymen. The US consumer suffers and capital is used in less productive ways than if the tariff were not in place. If Canadians are foolish enough to subsidize exports, the beneficiaries are Americans. Canadians are taxed so that Americans can enjoy cheaper softwoods.
Four: Do not subsidize in any way any good, whether sold domestically or to foreigners.
The flip side to number three above is that a nation should not subsidize exports. All the citizens of the exporting nation bear the cost, and the citizens of the importing nation reap the benefit.
Five: Scrap all existing trade treaties, agreements, etc. and defund and close down all trade offices and personnel.
Free trade is incompatible with managed trade. All trade agreements are “managed” trade. If they aren’t managed, then what is the point of the agreement itself? There is nothing to manage. But, if the point of the agreement is that a nation will open its doors to another nation’s products only if that nation reciprocates, then each nation is still pursuing the illogical and self-defeating precepts of a mercantilist trade policy.
Six: Do not intervene in any way into the internal affairs of any country.
If one’s own citizens are disgusted with the governmental policies of another country, they can privately boycott that country’s goods and refuse to invest in that country’s economy. This is the international equivalence of boycotting some local vendor. An example of this is 7-Eleven’s 2006 decision to drop Venezuelan state-owned petroleum company Citgo as a supplier of gasoline. The fact that the Venezuelan government has not changed its policies as a result of losing busiess in the US is no reason for the American government to take action. Americans who dislike Venezuela can continue to not purchase the products of the Venezuelan state and can simply feel reassured that they are not supporting the Venezuela regime by purchasing its most recognizable product — oil.
Seven: Do not enter into unlimited and/or ill-defined collective security agreements.
Just as a nation should not intervene into the affairs of others on its own accord, so the speak, it should be even more circumspect about not becoming legally tied to intervene in the affairs of others as a result of a collective security agreement. This would be second-hand intervention, whereby the nation itself is not attacked but acts as if it were. Collective security agreements should be written very carefully. Carte blanche agreements remove the incentive of one’s allies to resolve disagreements peacefully. There are few disputes in which one side is completely innocent and the other is completely guilty. There are few disputes in which there are only one of two alternatives. Furthermore, collective security agreements may backfire; i.e., reducing the security of current members and admitting new members with ancient animosities that they now find no reason to attempt to resolve peacefully. Collective security agreements suffer the same adverse consequences of other socialist policies.
Internationally, government should follow the maxim “mind your own business and set a good example.” Avoid intervening into the affairs of others and allow your good example to speak for itself. In trade avoid the fallacies of mercantilism. Avoid or strictly limit collective security agreements and follow the non-aggression principle.
Antony Davies is an associate professor of economics at Duquesne University and Mercatus Affiliated Senior Scholar at George Mason University. His primary research interests include econometrics and public policy.
Find Mr. Davies at his website: antolin-davies.com
His podcast: www.wordsandnumbers.org
And on Learn Liberty: http://www.learnliberty.org/speakers/antony-davies/
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