Protectionism Could Lead To American Poverty

To hear the latest batch of political salesmen tell it, China is a drug pusher in a schoolyard full of American schoolkids. The cheap goods the Chinese export market provides the American consumers may feel good, initially, but they are surely destroying America…causing manufacturers to shut down in the U.S. or relocate to China. Americans are, supposedly, trading jobs and long-term economic health to get their consumer goods at a great price.

The insidious method of this undercutting the competition? Underpricing of the currency. More accurately, however, the Chinese central bank is just matching the monetary inflation of the U.S. central bank. If China’s government underprices their currency, it’s only because they are trying to keep up with the U.S. government underpricing its currency.

Politicians are calling for China to knock it off. Or else. They want China to let their currency appreciate against the dollar, instead of losing value as quickly as the dollar.

In difficult times like these, it’s natural for people to look for someone to blame. The usual targets are being drug out before the crowds. The Occupiers around the world are blaming capitalism and the rich. The politicians in the U.S. are blaming China.

China’s undermined the might of U.S. manufacturing. They didn’t play fair. It’s not just a matter of outcompeting U.S. manufacturers on quality and price. They dealt from the bottom of the deck with currency manipulation.

That sort of thing ignores what policies and practices here in the U.S. might have done to make American business less competitive in the first place. It’s far easier to point the finger at foreigners.

Even if China’s currency is “unfairly” undervalued, politicians and lawmakers may be doing more harm than good by seeing to it that imports from China cost more.

This is where the unintended consequences come in. Unintended consequences are inevitable when politics interfere with individual preferences in the market. Tariffs or a rising renminbi would increase the price of Chinese imports in the U.S. This is supposed to lead to more jobs for Americans, as manufacturers would then find no benefit to set up in China.

But the goods produced here would be more expensive than they used to be coming out of China. More-expensive everyday goods are not exactly what Americans may need, with wages stagnant, falling and disappearing altogether.

The argument is that American jobs would be created, and the economy as a whole would be better off. But the true benefit would be for some exporting manufacturers, while the rest of society would pay for it in higher costs of goods.

Price inflation is currently written off as a nonissue because the “core” stuff of food and energy — which tends to rise plenty — are discounted. A rise in the renminbi would mean that all the other things Americans buy would no longer be cheap. Their prices would rise, too.

Further, a higher renminbi would mean that the Chinese themselves would have  more purchasing power per capita. Right now, China’s government would like for its purported economic might to benefit its people, whose purchasing power has been kept down in order to fuel the export market. These Chinese consumers would use that stronger renminbi to bid for the the same commodities that Americans wish to buy. We wonder how long it would take for American politicians to start blaming the Chinese for allowing their currency to rise, and causing higher food and gas prices in the U.S.

So a rapid rise in the strength of China’s currency could, easily, mean higher prices for everything in the U.S. There may be a rise in overall employment, but there is certainly no guarantee for a rise in overall wages to offset higher prices. In fact, it’s unlikely that the Federal Reserve would abandon its inflationary policies anytime soon. So Americans may end up in much the same situation the Chinese find themselves in now: with a strong export market but declining purchasing power.

Our stance is that it was government that caused the problems in the first place and government that will make the problem worse with more nonmarket solutions. The U.S. is going down the path of protectionism, continued currency debasement, trade wars that could end up being hot wars.

After a generation of accelerated debt expansion, thanks to central bank policy that resulted in wild malinvestments and bubbles in housing and education, Americans will have to contend with being poorer for a while. The scapegoating of China may score political points, but it will lead to bad economics that will make life even harder for Americans.

And there’s always the possibility that protectionism could lead to open hostility between the U.S. and Chinese governments. Wars cost both human misery and dollars. They’re paid for with higher taxes and currency debasement. But wars also tend to get a lot of popular support, if spun properly. So Americans may cheer as they find their standards of living declining even further, while their troops are shooting at yet another enemy.

Regards,

Gary Gibson