Why are so many of the things that are made in China delivered to American shores? Because China subsidizes its industries that make products for delivery in the United States, and because China devalues its currency to its own benefit.
Even when I was a kid, I noticed that a lot of stuff had the label "Made in China." As I got a little older, I discovered that a lot of what is made in China was not of very high quality. I've probably indoctrinated my kids a bit too much, because they can be heard to say, if a toy or electronic device breaks, "Oops! Must be made in China!"
The truth is, the quality of most Chinese products is improving dramatically. This probably has a lot to do with the fact that Chinese workers can demand much higher wages than in the past. This is a good thing. Higher wages bring higher standards of living, which brings parity among the workers of the world. In other words, higher quality products produced by workers in other countries means Americans will be better off.
What I'm concerned about, though, is how the Chinese government is subsidizing Chinese trade at the expense of the United States. They do it in two ways:
- By devaluing their currency against other currencies.
- By subsidizing products and services originating in China
[Hunter] gave an example of what that would mean for an American product versus a Chinese product.
"They're both $100, the Chinese government, in a practical way, walks by and says we just marked down our product to $60," he explained. "It's now cheaper than the American product. Why don't you buy it instead of the American product? That is sweeping the American product off the shelves around the world."
The implication is ripe that the extra revenues generated by this fraudulent scheme are being used to by military equipment to use against the United States.
On a segment of The Right Balance with Greg Allen this morning, Rep. Hunter stated that China provides a 17% subsidy for its manufacturers, a 17% tax on U.S. imports. On top of the 40% currency devaluation, this makes Chinese goods 74% cheaper than U.S. goods. No wonder it seems everything is made in China!
Meanwhile, the US is filing a complaint with the World Trade Organization.
I don't generally believe in tariffs. But in the case of competing with industries whose government subsidizes their efforts, I think the United States would be well off to impose a tariff to offset the subsidy. I think the Fair Currency Act will do this.
Frank,
ReplyDeleteInteresting, the original reason for the World Bank and IMF was to prohibit countries from devaluating their currancy in order to better their trading status. But when when the World bank shifted to a sliding currency scale, that was lost.
Second, we will can't aford to raise tarrifs because of the relationship of our monetary policy and trade policy. Quite frankly the problem is not with trade, but with our increasing money supply. Theoretically it is impossible to have a long term trade imbalance unless you are expanding your money supply. If our money supply were stable, we would have to export an equal value of goods in order to get our money back in order to buy more imports. The problem of loosing jobs overseas and an imbalance of trade is a moneteray policy decission. Until we understand this we won't understand the trade imbalance, or the immigration problem for that matter which is an importation of labor.
When Reagan ran for president he vowed to end stag-flation. During the 70s the Federal Reserve was stuck. If it increase the money supply inflation would increase, if they decreased the money supply, this would drive an alreadly stagnating economy into further recession. The solution was found in our trade policy. By disregarding our previous trade balance, we were able to buy cheep goods over seas with excess dollars produced in America. This allowed Federal Reserve to increase the money supply without a concomitant increase in prices. We have continuted this policy since Reagan. If we stop imports, inflation will rise, or we will have to reduce the money supply as an effort to control inflation and drive us into a recession. Don't expect any changes soon in our trade with China. We need their subsidized goods to keep prices under control here in America.
Shane
I hadn't thought about the fact that "By disregarding our previous trade balance, we were able to buy cheep goods over seas with excess dollars produced in America."
ReplyDeleteWhat happens when China or others decide they want to cash in all their extra dollars?
I urge you to read this post by GMU economist (and staunch libertarian) Don Boudreaux. I don't agree with Boudreaux on some issues, but his post and the comments of readers provide some interesting fodder for provoking thought on this issue. (Boudreaux is not addressing Hunter's undercutting issue; only the monetary issue. But the issues are related.)
ReplyDeleteBoudreaux says that China's current policy "forces Chinese citizens to subsidize the consumption of Americans and other peoples who import goods from China." He asks why Americans, as the ultimate beneficiaries of this arrangement, should complain. But he admits, "The real victims of such currency manipulation are the Chinese people."
If Boudreaux is right, then we ultimately have a moral dilemma. Is it morally right to engage in this kind of trading relationship? On the other hand, probably the best way to reduce China's potential to harm us militarily is to move it toward a more free society. What more effective way to do that than to trade with them?
I agree with the reach upward post, the real losers, economically, are the Chineese people. Compared to their former communism, it could be worse. Also Frank stated doesn't our trade imbalance with Chile allow them to hurt us if they wanted to dump their dollars on the market? Yes but they are benifiting from our trade. Hurting us would also hur them.
ReplyDeleteShane, Scott, and Anonymous:
ReplyDeleteThanks for stretching the limits of my understanding. I read the Cafe Hayek article that Scott linked to, and I think I understand it better now.
Here's the comment that I left on Cafe Hayek (maybe you can answer my question):
We can probably agree that China ultimately has little respect for its people if it is indeed taxing them in this way (and I am persuaded by you that they are). What is to stop them, then, from hurting them again while at the same time hurting the United States by flooding the world markets with unwanted dollars? And how easy would it be for them, in the court of current world opinion, to pin the blame on America if such an economic catastrophe were to occur?