Why Punish China? Punish the Federal Government

On Monday, Congress is renewing its efforts to impose punishments on Chinese imports as a retaliation against the alleged “manipulation of currency” by the Chinese government. The grounds for the new bill are that the Chinese government has been keeping the yuan artificially low which made US imports to China expensive and Chinese imports to the US cheap. Thus, a trade deficit gap appears between imports and exports to China. The gap was $273 billion wide in 2010: $91 billion in exports vs. $364 billion in imports. Between 2001 and 2010 this “manipulation” of the yuan has led to the loss of 2.8 million jobs in the US.

Apparently, the sponsors of the bill believe that a punitive tariff on imports from China will restore the trade balance and recover the jobs lost to the Chinese.

It won’t. The philosophy of such tariff comes from the archaic superstition of mercantilism – that government control of foreign trade and a positive trade balance are essential to prosperity of a nation. This superstition has been proven wrong multiple times in history. Apparently, American politicians are slow learners.

Several considerations make it obvious that such a bill is outright foolish:

First, ironically, the “manipulation” that the Chinese government has done with the currency is to tie it to the US dollar. Whatever is happening to the yuan is what the Federal Reserve is doing to the US dollar. If the yuan is getting weaker, it is only because the dollar is getting weaker.

Second, the share of consumption expenditures in the US on goods with a “Made in China” label is only 2.7%. Yes, that’s correct: only $2.70 of every $100 you spend when shopping goes to Chinese goods. And of that $2.70, not everything goes back to China. In fact, more than half of it stays in the US to pay for the American operations – salaries and profit.

Third, a tariff on Chinese imports won’t return jobs to the United States – if indeed, the imports were the reason for the loss of jobs, which is doubtful, as we will see. If a business closed because its market share was taken by Chinese imports, it won’t re-start just because the government imposed a tariff. Starting a business is a long-term endeavor and investment; short-term government activities can’t provide the sufficient foundation for a businessman to invest in building a manufacturing plant, knowing that the next Congress may decide to repeal the tariff. One side effect of such legislation would be that other economies with cheap labor will make their beachheads on American soil at the expense of the Chinese. Will Congress then declare trade war to the whole world?

Therefore, fourth, the only result of such tariff will be the punishment of the consumers who will now have to pay the US government an additional fee for the privilege to buy Chinese products. The result is that the US consumer will have to pay more, the US government will get more, and the Chinese exporters will get the same profits.

Fifth, the trade balance – deficit and surplus – is an awfully inadequate tool for economic analysis. It assumes that one dollar is the same always, in all circumstances. But it isn’t. One dollar invested in the US economy with its high productivity produces much more wealth than the same dollar invested in the Chinese economy. Africa is getting close to $30 billion of foreign aid every year – net money, without having to export anything for it – and it doesn’t produce any visible growth. Given the superior productivity of the American economy, the $91 billion in exports will produce much more added value back here in the US than the $364 billion we pay the Chinese for their clothes and shoes, in their economy. It is not the amount of money that matters, but the character of the people and the productivity of their economy. So the trade deficit between the US and China does not really enrich the Chinese – they simply do not have the economic environment and the economic culture to take full advantage of our dollars. In such situation, any obstacles to a free trade between China and the US will only distort the economic realities; government intervention never helps anyone, it only gives more power to bureaucrats.

But the most important issue of it all is that Chinese imports are not too cheap; it is the American manufacturing that is becoming too expensive. And it is too expensive not because it lacks productivity or because it is wasteful. It is the increasing burden of taxation and government regulations upon American businesses what makes their products too expensive. The Chinese government hasn’t done too much; it has only freed China’s export industries from taxation and regulations. The Federal government, on the other hand, has only increased the taxes and the regulations, making the American economy increasingly unable to compete even against a backward economy like the Chinese.

The $278 billion trade deficit between the US and China is a negligible part of our economy. In fact it is very small compared to the US government debt $14 trillion – only 2% of it. America’s greatest trade deficit is not with China but with its own government. Our own government has pledged 14 trillion of our dollars without offering anything in exchange. These $14 trillion were taken away from us by extortion and fraud. The Chinese at least delivered goods for their $278 billion. China is not our problem. Washington DC is.

So if Congress wants to protect the American economy, it should forget about China until it deals with the largest threat we have: Congress itself, and a Federal government that has grown too much. Washington DC must shrink to its constitutional limits, and it must get out of our lives and our businesses. Congress must stay by its Constitutional limits. It must restore liberty and justice throughout the land.

And we will take care of China ourselves.