Free to Trade with China (and Anyone Else): A Response to Michael Brendan Dougherty

What about China?

That’s the surprising objection I’ve received to my “Departing the Shining City,” which ran on The Bulwark over Labor Day weekend. My essay looks back on Michael Anton’s “The Flight 93 Election” and disputes his objections to immigration (broadly, not just “illegal immigration”) and trade (again broadly, not just “unfair trade”), as well as his rejection of Goldwater–Reagan conservatism.

I expected to get some criticisms for the essay, but I’m surprised that one I’ve received is a very narrow objection to trade with one particular nation: What about China?

For instance, National Review ’s Michael Brendan Dougherty makes this objection using two intertwined arguments:

• China’s industrial policies give its producers advantages that aren’t what’s intended by the Principle of Comparative Advantage.
• China’s protectionism keeps out U.S. goods, conflicting with that principle.

In short, Dougherty challenges the idea that America benefits from not restricting trade with nations like China that do restrict trade with us. To his credit, this idea does have prima facie force. As the title of his post asks, “What Was Free about Our Trade Relationship with China before Trump?”

It’s tempting to reply that, before Trump, Americans were free to have trading relationships with China (or, at least, such trade usually didn’t involve enormous U.S. taxes). A less pithy reply is to point out that the United States benefits from free-trading with such nations.

People commonly believe that trade’s benefit comes from exports boosting domestic incomes and jobs. Imports are deemed a harm that must be tolerated in order to export. This thinking is behind President Trump’s talk of trade surpluses as “winning” and “stealing,” and trade deficits as “losing” and “bad deals.”

But imports are beneficial just like exports. Remember that imports are merely domestically consumed, foreign-made goods and exports are domestically produced, foreign-consumed goods. In all voluntary exchanges, participants trade because they value what they receive more than what they give up. Consumers value the goods they receive above the money they exchange, and producers value the money they receive above the goods they exchange. Harm comes from blocking these mutually beneficial exchanges , not from the money going in only one direction, and this harm falls on both consumers and producers. This is true whether the producers and consumers live next door or half-a-world away.

Some people seem to fear that if a nation’s consumers trade away more money than its producers receive from foreign exchange—that is, that the nation has a persistent trade deficit—then the nation will run out of money and become impoverished. Those people can rest assured that the Federal Reserve won’t let that happen; it’s money-creation power is immense. But long before the Fed would need to step in, the stockpile of American dollars in foreign hands should reduce the dollar’s value relative to other currencies, making American exports more appealing and imports more expensive.

Dougherty and others likely would object that China’s government has impeded such currency adjustment by “sterilizing” U.S. dollars—using Chinese renminbi to purchase dollars from Chinese exporters and then sitting on those dollars. But this would be a benefit to Americans : in essence, we’d be getting valuable Chinese goods in exchange for easily replaced green paper (or computer code representing green paper). If you don’t think that’s a bargain for America, then I have a deal for you: send me a list of your valuable possessions and I’ll purchase them with my own personal currency that you can sterilize.

Dougherty et al. may also object that China subsidizes its exports. Again, this would be a benefit to Americans : China is taxing its own citizens in order to lower Americans’ prices. (Of course, that’s not such a great deal for China’s citizens.)

Some Chinese protectionist measures are troubling, such as intellectual property theft. And China’s human-rights abuses are worse. But, with the possible exception of confronting China over its authoritarianism, I don’t see the benefit from blocking or heavily taxing (i.e., restricting freedom) American consumers’ exchanges with Chinese producers. Such protectionism hurts Americans (and Chinese) just as China’s protectionism hurts Americans (and Chinese). Trade wars are bad and mutually destructive, and the United States would be far better off taking its complaints about IP theft to the World Trade Organization, which often forces China to change its trade policies.

If Dougherty wants to argue for trade sanctions against China over human rights abuses, I have a sympathetic ear (and some practical questions). But concerning the economics of trade, from 1992 to 2016 China’s weighted-average tariff on imports fell from 32% to 3.5% and the United States’ fell from 4% to 1.7%. That’s a tremendous increase in freedom and benefit for Americans and Chinese alike. What’s happened since is neither good nor a “win” for the United States or China.

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Thomas A. Firey is a Cato Institute senior fellow and managing editor of Cato’s policy journal Regulation.

The post Free to Trade with China (and Anyone Else): A Response to Michael Brendan Dougherty appeared first on Econlib.

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