China's Economic Schemes Hurt the Chinese Most of All
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.