What about China?
That’s the surprising objection I’ve received to my “Departing the Shining City,” which ran on The Bulwark over Labor Day weekend. My essay looks back on Michael Anton’s “The Flight 93 Election” and disputes his objections to immigration (broadly, not just “illegal immigration”) and trade (again broadly, not just “unfair trade”), as well as his rejection of Goldwater–Reagan conservatism.
I expected to get some criticisms for the essay, but I’m surprised that one I’ve received is a very narrow objection to trade with one particular nation: What about China?
For instance, National Review’s Michael Brendan Dougherty makes this objection using two intertwined arguments:
- China’s industrial policies give its producers advantages that aren’t what’s intended by the Principle of Comparative Advantage.
- China’s protectionism keeps out U.S. goods, conflicting with that principle.
In short, Dougherty challenges the idea that America benefits from not restricting trade with nations like China that do restrict trade with us. To his credit, this idea does have prima facie force. As the title of his post asks, “What Was Free about Our Trade Relationship with China before Trump?”
It’s tempting to reply that, before Trump, Americans were free to have trading relationships with China (or, at least, such trade usually didn’t involve enormous U.S. taxes). A less pithy reply is to point out that the United States benefits from free-trading with such nations.
People commonly believe that trade’s benefit comes from exports boosting domestic incomes and jobs. Imports are deemed a harm that must be tolerated in order to export. This thinking is behind President Trump’s talk of trade surpluses as “winning” and “stealing,” and trade deficits as “losing” and “bad deals.”
But imports are beneficial just like exports. Remember that imports are merely domestically consumed, foreign-made goods and exports are domestically produced, foreign-consumed goods. In all voluntary exchanges, participants trade because they value what they receive more than what they give up. Consumers value the goods they receive above the money they exchange, and producers value the money they receive above the goods they exchange. Harm comes from blocking these mutually beneficial exchanges, not from the money going in only one direction, and this harm falls on both consumers and producers. This is true whether the producers and consumers live next door or half-a-world away.
Some people seem to fear that if a nation’s consumers trade away more money than its producers receive from foreign exchange—that is, that the nation has a persistent trade deficit—then the nation will run out of money and become impoverished. Those people can rest assured that the Federal Reserve won’t let that happen; it’s money-creation power is immense. But long before the Fed would need to step in, the stockpile of American dollars in foreign hands should reduce the dollar’s value relative to other currencies, making American exports more appealing and imports more expensive.
Dougherty and others likely would object that China’s government has impeded such currency adjustment by “sterilizing” U.S. dollars—using Chinese renminbi to purchase dollars from Chinese exporters and then sitting on those dollars. But this would be a benefit to Americans: in essence, we’d be getting valuable Chinese goods in exchange for easily replaced green paper (or computer code representing green paper). If you don’t think that’s a bargain for America, then I have a deal for you: send me a list of your valuable possessions and I’ll purchase them with my own personal currency that you can sterilize.
Dougherty et al. may also object that China subsidizes its exports. Again, this would be a benefit to Americans: China is taxing its own citizens in order to lower Americans’ prices. (Of course, that’s not such a great deal for China’s citizens.)
Some Chinese protectionist measures are troubling, such as intellectual property theft. And China’s human-rights abuses are worse. But, with the possible exception of confronting China over its authoritarianism, I don’t see the benefit from blocking or heavily taxing (i.e., restricting freedom) American consumers’ exchanges with Chinese producers. Such protectionism hurts Americans (and Chinese) just as China’s protectionism hurts Americans (and Chinese). Trade wars are bad and mutually destructive, and the United States would be far better off taking its complaints about IP theft to the World Trade Organization, which often forces China to change its trade policies.
If Dougherty wants to argue for trade sanctions against China over human rights abuses, I have a sympathetic ear (and some practical questions). But concerning the economics of trade, from 1992 to 2016 China’s weighted-average tariff on imports fell from 32% to 3.5% and the United States’ fell from 4% to 1.7%. That’s a tremendous increase in freedom and benefit for Americans and Chinese alike. What’s happened since is neither good nor a “win” for the United States or China.
Thomas A. Firey is a Cato Institute senior fellow and managing editor of Cato’s policy journal Regulation.
READER COMMENTS
Jon Murphy
Sep 20 2019 at 12:52pm
I think it is also worth noting China has been generally improving (ie lowering) non-tariff trade barriers as well up until this trade war.
renato
Sep 20 2019 at 2:42pm
> Dougherty and others likely would object that China’s government has impeded such currency adjustment by “sterilizing” U.S. dollars—using Chinese renminbi to purchase dollars from Chinese exporters and then sitting on those dollars. But this would be a benefit to Americans: in essence, we’d be getting valuable Chinese goods in exchange for easily replaced green paper (or computer code representing green paper).
Isn’t the complaint against trade deficits an abbreviation for the problem in the long-term when China cashes the stored money?
The real problem is much harder to articulate shortly for news and it also depend on the value of how much deficit is still healthy.
I agree that the trade deficits are just an artifact which should correct itself, as it depends on the exchange rates correlating with those deficits as you mentioned.
However, if China is holding enough money, this mechanism will not work as expected, and some the deficit will have to be balanced.
Has the US adjusted its money emission to deal with the fact the China is sterilizing some of it?
Can it deal with the effects of China cashing that money without US control?
Warren Platts
Sep 21 2019 at 4:38pm
Yes. It is called the Baldwin-Hawley bill. It will mandate that “market access fees” (MACs) be charged for foreign capital inflows.
Jon Murphy
Sep 22 2019 at 7:56am
The money supply can grow and shrink. If China were to cash those dollars (which necessarily means buying US goods/services/assets), and the Mon supply becomes “too” large, then the Fed can reduce the money supply through open market operations.
Warren Platts
Sep 21 2019 at 4:34pm
Here are a few of the reasons there should be zero trade with China. And the fact that they are unreconstructed mercantilists who engage in unfair trade practices is the least of all reasons:
China is undergoing one of the most rapid rearming since 1930’s Germany. Why? Is it because they are afraid of Mongol hordes? Nope. They are explicitly designing weapons systems meant to counter American weapons systems. Thus when you trade with China, you are providing them with profits that will help them “fight and win”, as General Secretary Xi is fond of saying, a war with the United States.
Their doctrine is clearly spelled out in the book “Unrestricted Warfare”. It is basically a modern version of SunTsu’s “Art of War”. For China, war is a constant, whether it involves actual shooting or not. In fact, they prefer to avoid hot wars; the goal is to achieve world domination without having to fire a shot.
On page 55 of that book, there is a mode of extra-military warfare that they call “drug war”–the spreading of chaos while making huge illicit profits. Thus it is no coincidence that China is pretty much the sole source of the fentanyl that is killing at least 30,000 Americans every year–as many Americans that were killed in the entire Korean War (of which China participated for you youngsters). Note that the fentanyl exports started happening shortly after Chairman Xi’s accession to power.
China is still engaging in forced organ “donations”. People are imprisoned for meditating in an unacceptable manner, until someone with matching DNA needs some organs, and then they are dissected while still alive.
According to the State Department, there are THREE million Uighurs interned in concentration camps because they happen to have the wrong religion. We have seen this movie before. And speaking of IP theft, if you ask me, the satellite photos of the Chinese concentration camps are uncannily similar to the layouts of the old Nazis concentration camps. The crematoria are already built. The camps could easily be turned into totenlagers–death camps–overnight. Millions of people could be killed before the world even realizes what happened.
Then there is the South China Sea. In blatant defiance of International Law, they have taken over rocks that are in other country’s Exclusive Economic Zones (EEZs), and turned them into military air bases. And now they are threatening U.S. Navy ships, and other western fleets that are exercising their right of free navigation, painting our aircraft with weapons targeting radar, not to mention the destruction to the local ecology.
And last, and probably least, if you happen to care about global warming/climate change, China’s CO2 output per GDP unit is literally 4X the USA’s. For industrial products like fertilizer or steel, the multiple is more like 5X-7X times more CO2 per pound of physical product. Free traders who worry about climate change–it is an intellectual contradiction.
Bottom line: People–Libertarians especially–who advocate for trade with China should be ashamed of themselves.
Thaomas
Sep 22 2019 at 7:45am
But there is no link between how zero compared to 1/2 compared to 2 x the present amount of trade would affect the behavior of the Chinese government.
Concerning reason 4 (not that there ARE many Libertarians who are concerned by climate change) a revenue neutral tax on net CO2 emissions would naturally have a border adjustment on CO2 content if the trading partner did not have an equivalent tax on net CO2 emissions.
Warren Platts
Sep 22 2019 at 8:15am
If by behavior of the Chinese government, we mean their intentions, that is virtually impossible to change, as history has proved. However, we can change their capabilities. If both their exports and imports were restricted–especially energy imports–their economic growth would be reversed.
One must understand that China is not an ordinary nation-state–as they are the first to admit. It is what they call a “civilization-state”. The closest analogue would be if somehow the old Roman Empire had survived into modern times. China is a polyglot empire.
Thus the goal should not be to modify the behavior of the Chinese government. The goal should be regime change, followed by splitting up the country into about 13 different pieces. The world would be made much safer as a result, and much better off economically.
Jon Murphy
Sep 22 2019 at 9:14am
I beg to differ. See David Henderson’s various posts on this very blog over the past few weeks. See also: Terry Anderson (“Free Market Environmentalism”), pretty much anything PERC puts out, my various writings on the matter, Bjorn Lomberg, Matt Ridley, Robin Hanson, just to name a few.
Just because we do not like the idea of a carbon tax does not imply we are not concerned by climate change any more than saying that because we oppose minimum wage we must not be concerned about poverty.
Warren Platts
Sep 22 2019 at 10:10am
One can be for free trade, or one can be for reducing carbon emissions. One cannot be for both.
Jon Murphy
Sep 22 2019 at 12:06pm
Well, that’s obviously incorrect both empirically and theoretically; just quickly looking, we can see the freest economies tend to be the cleanest areas to live while the least free tend to be the dirtiest. Indeed, one thing economics teaches is that free trade increases environmental cleanliness, not reduces it. Clean air, clean water, etc are luxury goods. When one is always worrying about where one’s next meal comes from, one is not too concerned about long-term issues.
Further, free trade punishes waste because it is an extra cost. Firms are constantly encouraged to reduce waste (yes, this is even true in an externality situation: see Coase 1960, Dahlman 1979, Murphy 2019, and Buchanan and Stubblebine 1962 just to name a few).
It was true that the mindset of “One can be for free trade, or one can be for reducing carbon emissions. One cannot be for both” was generally accepted from about 1928 to 1960, but beginning with the Coasian Revolution and progressing through modern times (so the past 70 years or so), we have seen lots and lot of research showing the direct correlation and causation between free markets and cleaner environments.
I’d recommend reading Terry Anderson and Donald Leal’s excellent 2015 book “Free Market Environmentalism for the Next Generation” as a starting point. This blog also has many great articles on the matter.
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Now, to be clear, one can reduce carbon emissions by restricting markets. Indeed, one could solve a lot of problems by causing recessions and reducing real wealth. The Romans had fewer carbon emissions than present day, but I don’t think anyone would claim that was prima facie a good thing.
We need to make a distinction between merely adjusting some metric and actually practicing good economic sense. As an aside, this is a constant problem with developmental economics (and social sciences in general). Once a metric is chosen as a measure of some desirable outcome, the game becomes about manipulating that metric rather than actually achieving the outcome. For example, much of developmental aid focused on merely giving capital to developing nations seeing that nations with higher amounts of capital tended to be richer. But much of this capital simply fell by the wayside and remained unused to this day. People misunderstood the causal relationship and it began to be all about measuring capital rather than fostering economic growth. See Coyne 2013.
This issue with measurement vs results is a huge issue in statistics and probably plays a lot into the Replication Crisis.
Furthermore, there is an excellent debate in the Philosophy of Science field on this exact matter (see, for example, Kuhn 1962, Polanyi 1958, Hayek 1962, Lakatos 1970, Popper 1972, and Lavoie 1985).
Warren Platts
Sep 22 2019 at 1:14pm
Empirically, regardless of theory, it is clear that free trade with China, in particular, has significantly increased global CO2 emissions. Since the peak in 2005, USA has reduced its within-border CO2 emissions by about 1 billion tonnes. Most of that is due to switching from coal to natural gas for electricity generation, and, to a lesser extent, increasing renewables, and offshoring of industrial production.
Thus the latter portion–due to offshoring of industrial production–shouldn’t even count. But if China was as efficient CO2-wise it would be a wash–no big deal. However, as I said above, China’s CO2/GDP unit is 4X: 2 lbs/$ versus 0.5 lbs/$ for USA. And for industrial production, it is even worse. David Koch himself once said that his fertilizer that he imports from China is 5X more CO2 intensive than that he produces within USA because they use coal gas instead of natural gas to make it. Similarly, Dan DiMicco told my that Chinese steel is 6X-7X more CO2 intensive than steel made by Nucor.
Thus, the majority, if not all, of USA’s reductions in CO2 emissions are offset by the CO2 embodied in Chinese goods imports. We import around $540 billion worth of goods from China. Conservatively, that amounts to over 600 million tonnes of CO2 embodied in those imports compared maybe 125 million tonnes of emissions that would be produced if all that production was reshored to the United States. Thus ending trade with China would lower global CO2 emissions by close to 500 million tonnes.
But as I said above, there are a number of other strategic and moral reasons for ending the China trade. Lowering global CO2 emissions is no doubt the least important.
Jon Murphy
Sep 22 2019 at 4:27pm
Looking at absolute numbers is the incorrect way of measuring. It will naturally bias your argument in your favor, but provide no real value. Emissions per capita or per unit of output is the better way to measure.
In other words, merely pointing out that certain means of production that may be preferable under free trade have higher CO2 emissions than other means does not imply free trade necessarily means more emissions.
Take a look at the various things I cited.
Warren Platts
Sep 23 2019 at 11:30am
Jon, perhaps you should take a look at what I actually wrote, e.g., “China’s CO2/GDP unit is 4X: 2 lbs/$ versus 0.5 lbs/$ for USA.” And, “For industrial products like fertilizer or steel, the multiple is more like 5X-7X times more CO2 per pound of physical product.” As for the atmosphere itself, the only thing it cares about is the absolute number of CO2 molecules contained within it.
I was not trying to make a philosophical point. I was merely pointing out that in today’s world–as it is–free trade with China significantly increases global CO2 emissions to the point where it largely offsets whatever hard-won reductions the USA has managed. Growing renewable energy production is going to be expensive. But what is the use when the resultant CO2 reductions are more than offset by the large amounts of CO2 emissions embodied in the cheap consumer goods we import? Reshoring industrial production back to the United States is low-hanging fruit that can help put a brake on global CO2 emissions, rendering the need for special carbon taxes moot.
Jon Murphy
Sep 23 2019 at 12:13pm
Right. Note that you are selectively looking at per unit and sometimes absolute. You need to be more consistent, which is my point. Merely stating that certain activities in China are more C02 intensive than the US does not imply that reshoring will reduce CO2 output.
Warren Platts
Sep 23 2019 at 3:16pm
There is nothing inconsistent by noting that the formula absolute carbon emissions must equal carbon emissions per unit of GDP multiplied by the absolute GDP.
Sorry, but the math implies that you are incorrect. According to Nucor’s 2018 annual report, their CO2/steel mass ratio is 0.88. For China, I was able to dig up a figure of 2.15. Thus for every ton of Chinese steel for which a ton of Nucor steel is substituted, there is a net reduction in CO2 emissions of 2.15 – 0.88 = 1.27 tons. Not counting the savings in shipping emissions. That is significant considering the steel sector is the single largest CO2 emitter globally, and that China comprises roughly half of all steel capacity.
Jon Murphy
Sep 22 2019 at 12:46pm
One other quick point about this: often market interventions increase carbon and other pollution emissions.
Two examples:
First: the Jones Act. Shipping is one of the most energy-efficient ways to transport goods over large distances. However, the Jones Act increases the marginal cost of shipping between US ports, thus making less energy-efficient options like air cargo and trucking more viable on the margin. So, the Jones Act, by encouraging forms of shipping that produce relatively more carbon emissions than shipping, actually increases CO2 output compared to the free-market level.
Second: the catalytic converter. The catalytic converter was made mandatory in autos in the 80’s (I believe. May have been the 70s). Nominally, this was done to reduce emissions. However, the Japanese imports at the time already met and exceeded the emission standards required without catalytic converters. They asked to be exempt from the requirement. The US government said no and Japanese autos were forced to remove their own converters and install catalytic converters, thus reducing the efficiency of their autos (this also increased their prices, so it should be no surprise to anyone to see that the domestic auto manufacturers were huge supporters of this requirement). So, the CO2 emission level was higher in the case of this intervention than in a free market.
So yes, one can be in favor of reducing CO2 and free markets. There is nothing contradictory about it either in theory or empirically.
Warren Platts
Sep 22 2019 at 1:29pm
Note that I said “free trade”–not “free markets”. As I pointed out above, the majority of U.S. CO2 reductions have come the free market moving from coal to natural gas.
As for the Jones Act, the current generation of merchant ships being built in the United States are the cheapest-running (fuel-wise if not labor-wise) and lowest-emission ships out there because they are made to run on LNG.
Note that international shipping accounts for a full 2% of global CO2 emissions.
Thus if we were serious about reducing global CO2 emissions, we would strengthen the Jones Act along the lines of the old British Navigation Acts and mandate that only LNG-powered, U.S.-built-with-American-steel (since such steel and construction would be a lot less CO2 intensive than ships built in China) would be allowed to deliver cargo to USA’s ports. This would of course raise the cost of shipping somewhat, thus lowering the temptation to engage in labor and pollution arbitrage (the Wall Street designation for “free trade”) and thus further reduce global CO2 levels.
Jon Murphy
Sep 22 2019 at 1:50pm
That’s a distinction without a difference.
Warren Platts
Sep 22 2019 at 3:13pm
There is a big difference. It is possible–as the USA did for 200 years–to maintain a free market within one’s borders while maintaining relatively high tariffs wrt to the ROW. Conflating the two concepts merely serves to obfuscate discussion.
Jon Murphy
Sep 22 2019 at 4:24pm
No, you cannot differentiate the two. When trade is limited externally, it is inherently limited internally as well. A government is arbitrarily shutting off avenues of trade thus reducing the ability to trade at home freely.
Consider the following: If a person was told “you can go to any church on this approved list of churches, but not beyond it” would you consider this person to have free religion? Of course not! The mere fact that he is shut off from certain avenues he may deem more valuable necessarily means he is not free.
In other words, merely the ability to make a choice does not make one free.
For more on this, see Smith 1776, Hume 1757, Ricardo 1817, Bastiat 1850, Marshall 1890, Samuelson 1941, Samuelson & Nordhus 2009, Freidman 2002, or Krugman et al 2018, just to name a few.
It is fundamentally impossible to have non-free trade outside the nation and free trade inside the nation.
Warren Platts
Sep 23 2019 at 12:10pm
You will not find that idea in any textbook. The standard procedure is to introduce first how free markets work within a closed economy, and only later in the textbook introducing the added layer of complexity that international trade brings to open economies. Indeed, if it is “fundamentally impossible” for there to be “free trade” within a closed economy, then since the global economy is a closed economy, there can be no possibility of free trade anywhere on Planet Earth–that is absurd!
Interesting that you should mention arbitrary religious repression, because that’s exactly what they do in China. E.g., in addition to outright mass imprisonment of Muslims and Falun Gong, the officially atheist CCP appoints its own bishops to the Catholic Church, “house churches” are routinely broken up, crosses taken down, bibles burned, pastors arrested. Why I just read the other day they are preparing to identify who the next reincarnation of the Dali Lama is going to be!
So why do you support trade with such a regime that renders its people radically unfree? How is buying stuff from China any different from buying cotton grown and picked by African slaves? What about clothes sewn in Uighur work camps? You wouldn’t buy them? How would you know the difference? Is that the true measure of freedom: the freedom to trade with the unfree?
If your answer is you are trading with individual, if faceless, Chinese merchants, not the CCP itself, that is a moral copout. The total amount of taxes China collects on U.S. exports is close to 50% if you count all the VATs and other taxes besides tariffs. Similarly, Chinese exporters typically only receive partial VAT rebates–thus essentially functioning as export tariffs. And of course half the Chinese economy is state owned anyway. So even if you think you are an individual trading with another individual, you are still providing dollars to be used finance the Chinese police state.
Jon Murphy
Sep 23 2019 at 12:16pm
Except for the ones I cited and many more.
Yes, precisely my point. The two interact with one another, QED. Do not confuse a modeling thought experiment to teach fundamentals (starting with a closed economy) as a description of reality.
Warren Platts
Sep 23 2019 at 3:38pm
Jon, that is simply not the case. You stated that it is “fundamentally impossible” for there to be free market conditions within a closed economy. No textbook says that. In fact, here is a little blurb from Samuelson’s textbook:
That sounds like a free market to me. Similarly, Mankiw’s Macroeconomics spends the first 5 chapters discussing economic laws of a closed economy.
Now, it might happen to be the case that as of 2019, most of the world’s economies are relatively open. But that historically contingent fact does not imply that it is “fundamentally impossible” for their to be a free market within a closed economy. Pre-Meiji Japan comes to mind. More importantly, the global economy as a whole is a closed economy. Thus everything that Mankiw says in those first 5 chapters must apply to global economy. E.g., S=I in a closed economy, but not in an open economy. But for the global economy as a whole, savings must equal investment.
Thus your point implies a logical contradiction. Since only open economies are free, according to your original idea (original because it does not occur in any textbooks), then the open economies of the world are free, but the world economy as a whole is not free.
But this philosophical digression has little to nothing to do with the China trade or the effect of that trade on CO2 emissions. It might make a good topic for a future blog post, however! 🙂
Jon Murphy
Sep 22 2019 at 9:15am
When you say “no link” what do you mean?
Walter Boggs
Sep 23 2019 at 2:15pm
As a consumer and producer, I assert my right to trade with any willing partner, anywhere, for reasons of my choosing and on conditions agreeable to me. I consider this my basic human right and do not grant my government permission to interfere.
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