I've already written extensively on
globalization and
China, but with the House
overwhelmingly voting yesterday (by a bipartisan 348-79 margin) to pass a bill favoring the imposition of tariffs on Chinese imports, I feel it's necessary to follow up. The election-year rhetoric in D.C. is now hitting a fevered pitch over this issue, as the Financial Times notes:
“They cheat to steal our jobs,” said Mike Rogers, a Republican from Michigan, while Dana Rohrabacher, a Republican from California, attacked China’s “clique of gangsters” that was doing “great damage to the people of the United States of America”.
Since I've already made my thoughts on this mess fairly clear, this time I'll let some others do the talking, beginning with economist
Michael Hudson, who cites six crucial economic errors--not all of which I'll excerpt--behind the anti-China rhetoric.
(Hudson's article, while long and economically dense, is exhaustive and a must-read. Also, all emphasis is mine).
It is traditional for politicians to blame foreigners for problems that their own policies have caused. And in today’s zero-sum economies, it seems that if America is losing leadership position, other nations must be the beneficiaries. Inasmuch as China has avoided the financial overhead that has painted other economies into a corner, nationalistic U.S. politicians and journalists are blaming it for America’s declining economic power...
[Princeton and L.S.E.] Professor [Paul] Krugman describes China as “deliberately keeping its currency artificially weak. … feeding a huge trade surplus,” adding that “in a depressed world economy, any country running an artificial trade surplus is depriving other nations of much-needed sales and jobs.” In his reading the problem is not that America has let its economy be financialized, or that easy bank credit has bid up housing prices for American workers and loaded down their budgets with debt service that, by itself, exceeds the wage levels of most Asian workers. “An undervalued currency always promotes trade surpluses,” he explains.
But this is only true if trade is “price-elastic,” with other countries able to produce similar goods of their own at only marginally different prices. This is less and less the case as the United States and Europe de-industrialize and as their capital investment shrinks as a result of their expanding financial overhead ends in a wave of negative equity. To assume that higher exchange rates automatically reduce rather than increase a nation’s trade surplus is Junk Economics Error #4. It is a tenet of the free market fundamentalism that Prof. Krugman usually criticizes, except where China is concerned...
Wall Street’s idea of “equilibrium” is that if only foreign countries would commit financial suicide along the lines that the United States is doing, then global equilibrium could be restored. But the most successful economies have kept their FIRE-sector [Finance, Insurance, and Real Estate] costs of living and doing business within reasonable bounds, and are not remotely as debt-leveraged as the United States. German workers pay only about 20% of their income for housing – about half the rate of their U.S. counterparts. German practice is not to make 100% mortgage loans, but to require down payments in the range of 30% such as still characterized the United States as recently as the 1980s.
The FIRE sector’s business plan has priced U.S. labor out of world markets. There seems little likelihood of making Chinese and German workers pay rents or mortgage interest as high as the United States. How can American economic strategists force them to raise the price of their college and university tuition so that they must take on the enormous student loans of the magnitude that Americans have to take on? How can they be persuaded to follow the high-cost U.S. practice of adding FICA-type wage withholding to the cost of living to save up pensions, Social Security and medical insurance in advance, instead of the pay-as-you-go basis that Germany quite rightly follows?
In other words, as I've said before, we export our labor to China not because of exchange rate manipulation, but because U.S. labor rates are simply too high. If we impose tariffs on China, global corporations will simply choose to outsource their labor to Vietnam, India, or even Germany. Anywhere but here.
This is where I will pass the baton to Mish Shedlock, of
Mish's Global Economic Trend Analysis. In excerpting the same Hudson piece that I excerpted, Mish writes that:
Another Krugman flaw is that he seldom if ever looks at the consequences of what he proposes. Even IF manufacturing jobs returned to the US after tariff hikes, it would be at the expense of dock workers unloading ships, truckers hauling goods from coast to coast, and most importantly higher prices for consumers everywhere. Higher prices are not a good thing. Higher prices would benefit the few whose jobs were saved, at the expense of everyone else. Higher prices also benefit governments that take a sales tax bite out of every transaction and squander it on needless projects...
Inflation is the one and only endgame of any tariff action. Corporations will face higher input prices, and will pass those hikes on to the consumer. Even if we do create jobs (which is questionable), the 90% who are currently employed will see a complete erosion of their purchasing power as inflation takes hold.
Mish goes further, engaging in an exercise that attempts to fully understand the repercussions of our government's actions, even if exerting pressure on China proves "successful".
Here's a thought test. What would happen if China raised prices 20% across the board via an export tax or reevaluation of the Yuan, starting tomorrow?
For starters, the Chinese economy would implode overnight along with collapsing exports. US importers such as Walmart, Target, Best Buy, and Kohls would seek new supply chains from Vietnam, Korea, Singapore, or India, but that would take time. In the meantime, US stores would run out of some goods. US consumers would go on strike until the supply chains were restored. Hundreds of small businesses would go bankrupt. Finally, businesses going bankrupt would pressure the banking system.
Of course, China could raise the export tax 1% a month for 20 months. In that case, instead of an overnight collapse, China would implode in a few months as US importers made other arrangements.
Would any jobs return to the US in either scenario?
In theory, a handful of manufacturing jobs might, but only if US importers could not find another source of supplies. What if every country voluntarily placed a 20% export tax on goods headed for the US, or the US placed 20% tariffs on all allegedly "underpriced" goods.
In that case, global trade would collapse and we would lose manufacturing jobs and millions of other jobs as well. In other words, there would be a global depression if prices rose 20% via export taxes or tariffs, whether overnight or over the course of a year.
Thus, Krugman is simply off his rocker, as is anyone else who think tariffs will solve our problems.
This whole China issue continues to show government and politics at their worst. Oversimplifying
very complex issues for the benefit of a soundbite and political grandstanding; telling people what they want to hear instead of focusing on hard truths; and, worst of all, scapegoating foreigners and immigrants in order to pander to potential voters.
Protectionism is always politically popular during a recession, but it is also always self-defeating, as the
Smoot-Hawley Tariff of 1930 should have taught us. (
The key excerpt of that link for me: "Such policies contributed to a drastic decline in international trade...Overall, world trade declined by some 66% between 1929 and 1934. More generally, Smoot-Hawley did nothing to foster trust and cooperation among nations in either the political or economic realm during a perilous era in international relations.") We, and the politicians in Washington, must be extremely careful not to fall into the protectionist "beggar-thy-neighbor" trap.
There are a lot of hard truths that America still has yet to face in this global recession. As long as our elected officials insist on treating every crisis as an opportunity to gain the political upper hand--instead of an opportunity to LEAD--we'll never actually face them.
[Financial Times]
[Michael-Hudson.com]
[Mish's Global Economic Trend Analysis]
