Chinese Devaluation and American Protection

A couple weeks ago the New York Times ran an article entitled, “China Uses Rules on Global Trade to Its Advantage.” At first glance one might assume such actions by the Chinese to be grossly unfair. American politicians and academics argue that China’s devaluation of its currency does not allow other countries a fair opportunity in the global trade arena. Is this really the case? Or is China simply using its economic might in the same way that both Britain and the United States have in the past?

China’s advantage is that it efficiently produces goods that consumers abroad want and can afford to buy. The Times article actually backs up such logic: “China had a $198 billion trade surplus with the rest of the world last year, with its exports to the United States outpacing imports by more than four to one” [emphasis mine]. This brings to mind the economic Law of Comparative Advantage. China has established itself as the world leader in efficiency while the rest of the world tries to compete directly, rather than finding a profitable niche market untapped by China. This is not to say companies in other countries cannot make a profit, they do every day. China simply enjoys circumstances such as a low cost of labor that helps it produce goods at a lower cost.

In order to combat China’s advantage, the U.S. government has taken a page from the protectionist playbook and proposed a 25% tariff on Chinese goods to the Chinese and their devalued currency. This may appear good at first glance, but economics is not about first glances. Economics is an art. As Henry Hazlitt defined it in his book Economics in One Lesson, “The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy…” In this case a 25% tariff is horrible in the long term. Perhaps our emotions are appeased by “sticking it to China”, but imagine the consequence to the American consumer, already struggling to pay bills, if the price of every Chinese good increases 25%. Presently, low priced Chinese goods are enabling lower and middle class Americans to enjoy higher standards of living despite a sluggish economy. The government, under the pretense of help and protection, is about to promote a policy that will hurt the very people it uses to justify the tariff in the first place.

On top of the consumer issue, a 25% tariff is simply a crutch that the U.S. government gives to competing American companies. This crutch makes it easier to compete with Chinese firms. Why, though, should they stay in business if they cannot compete? We should approach this issue with logic rather than emotion. Free up those currently idle resources and allow more profitable, entrepreneurial firms an opportunity to show what they can do.

I admit that such talk by professionals, when mentioned to the emotionally in-tune economic layman, is often viewed as a “wrong against [insert certain group of people].” There is one problem with such a response. Economics, like nature (think gravity), has set laws that cannot be changed, regardless of current wishful thinking in politics.