Wednesday, August 8, 2007

"'Greediest' Act in History"

On July 10, 1930 a headline on page 9 of the New York Times read "[Georgia Congressman Walter] George Says Tariff Hits Canada's Trade-- Our Exports are 'Strangled' by 'Greediest' Act in History, Senator Asserts" in reference to the Smoot-Hawley Tariff. At the time 1,028 economists signed a petition that was printed in the New York Times opposing the restrictions and warning that they would do serious damage to our National economy.

Last Wednesday, August 1, 2007, a full-page ad ran in the Wall Street Journal with the names of 1,028 professional economists who signed a petition to congress against proposed sanctions against China for what the Bush administration and members of Congress have called "unfair trade practices." The "unfair practices" in question basically amount to controlled under-valuation of the Yuan to make the dollar price of China's exports more attractive to American consumers, and thus gain an advantage and accumulate trade surpluses. Be that as it may, this is not necessarily a justification for harsh retaliation.

Most people understand that trade is good for the Global Economy. What most people fail to realize is that trade, generally speaking is good for all countries freely engaged in it; the more the better. Our openness to trade does not benefit China purely at our own expense, as it would in a zero-sum game. Our unilateral openness to trade provides positive aggregate economic gains to both China's economy and our own. (Note: the aggregate gains can mask some very serious distributional consequences. Although not explicitly described here, I'm aware of and concerned about them.) Similarly, the imposition of new barriers to trade (sanctions) hurts both economies and, more importantly, can lead to a trade war. So, not only do we hurt ourselves by unilaterally imposing sanctions, but by provoking further retaliation from China, they have an effect that is exactly the opposite of what we hoped to achieve-- an end to China's unfairly restrictive policies. It would be like a robber going into a bank and saying, "Stop or I'll shoot myself!"

Finally, I got a great follow up question on this: "How do we stop China from sending us dog food with rat poison it in?" The question is a bit of a non-sequitor, but valid in the sense that there are legitimate concerns about safety, etc. Here's my response: "Why not just inspect a sample of goods imported from other countries, in the same way we inspect US-made goods, instead of exaggerating the transgressions of Chinese dog food factories as a justification for policies that distort and injure our entire economy?" I gave the following analogy: "Problem-- UV rays from the sun cause skin cancer. Congressional Solution-- block out the sun. What they don't tell you-- Mr. Burns bribed Mayor Quimby so he could sell more electricity." (Note: Some of you will recognize this as a thinly-veiled reference to an episode of The Simpsons. It is also an oblique reference to "The Petition of the Candlemakers" one of the Economic Sophisms of Frederic Bastiat. Look it up.)

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