Do Not Fear the Chinese Economy

Hand-wringing over Chinese economic growth is both common and bipartisan. Commentators and politicians from the left and right alike find something fearsome in the rise of China as an economic force to be reckoned with. From Paul Krugman to Pat Buchanan, we are told to be concerned. Be very concerned. But these concerns are almost entirely based on faulty economics, and are therefore misplaced.

Before I get into some of the specific arguments, I want to make a simple point that few seem to truly accept: the economic success of another is not your failure. There is no set, fixed pie of wealth.:  We are not “falling behind” just because the Chinese economy is growing faster (and why shouldn’t it be when they have so much farther to climb?). The left can be somewhat excused for not seeing how this applies to China since they don’t even see how it applies among Americans, but the right does get it domestically, by and large. This is why I get frustrated to see Chinese economic scaremonger from the right as well as the left.:  The rhetoric surrounding the rise of China mirrors closely the fearmongering over Japanese growth that was so common throughout the 80’s. Needless to say, the fear proved ill-founded, as the Japanese economy collapsed in 1989, and subsequent dabbling in Keynesian stimulus policies condemned the nation to a “Lost Decade” of stagnation.

Now the next great Asian threat is China. And the primary cause of this threat is their so-called “currency manipulation.” China, we are told, is unfairly devaluing its currency and thus boosting exports. This costs America jobs and harms the US economy. Sounds plausible enough, right? In fact, it was this reasoning that led to:  bipartisan support for recent legislation granting President Obama:  “expanded authority to impose tariffs on virtually all Chinese imports to the United States.” I doubt any supporters of the legislation stopped to consider how well it turned out the last time tariffs were imposed in the midst of an economic slump.

The currency-manipulation argument sounds plausible enough, but it’s not actually valid.:  It is a common protectionist misconception that exports are benefits and imports are the price we pay to export goods and create jobs. This view is entirely backwards. In fact, exports are the price we must pay in order to get the goods we desire. When you go into a store, your goal is invariably to minimize what you must export (pay) for what you wish to import (buy). The more you can get for less, the better. It is no different on a national scale. There is no more reason to complain about cheap goods offered from China than there is to complain about bargains from Best Buy or Barnes and Noble.

Consider the impact of a devalued Chinese yuan (assuming it actually is devalued, which is debatable). Chinese workers are payed with a currency worth less than it otherwise would be, giving them less purchasing power and thus making them poorer. US consumers, on the other hand, get more Chinese goods for a cheaper price than they otherwise would. This is essentially a subsidy of American consumption by the Chinese worker. We are the winners and they are the losers in this arrangement.

“But wait,” I can hear the mercantilists saying, “what about the lost American jobs? What good are cheaper trinkets if we have no jobs and no income!”

Why, dear mercantilist, do you assume that we would have no jobs? Sure, there will inevitably be some particular jobs lost by any influx of cheap Chinese goods, but that’s true of all trade regardless of who it is with or the valuation of their currency. Even in the strongest economy, tens of millions of jobs are lost every year. Uncompetitive sectors close down and new ones rise up. Most people don’t see this, however, because economic statistics only report net job changes. Hiding behind these figures are a dynamic system of destruction and creation. Jobs producing goods which we can get cheaper elsewhere are lost, while jobs making new goods and providing new services are added. When the Chinese subsidize a product, allowing US consumers to buy it cheaper than American manufacturers can make it, it frees up labor to be utilized elsewhere.:  We then benefit both from that labor and the cheap Chinese goods, which grows our economy.

There is no set number of products throughout the entire world that can be manufactured, for which all countries must then compete. Economic activity is not a race to grab a fixed pie, it’s a cooperative endeavor to grow the pie. New products and services are invented everyday, and the less it costs us to get existing products, measured in either dollars or labor, the more that is available for expansion elsewhere. The:  industrial revolution was only possible after most agriculture jobs were “lost” to greater productivity.

Outside of the strictly economic arguments, there are some legitimate concerns about China. The share of American debt held by China, and its possible usage to strong-arm the US on matters of defense, is at least arguably problematic. I’m not staking a position on this point either way, but even if we assume the concerns to be legitimate, the problem is not the value of the Chinese currency, nor even the dynamics of trade between the US and China, but the size of the debt itself. They can only buy so much of our debt because we have so much debt in the first place, after all. Assuming Chinese ownership of American debt is problematic, the correct solution is not to hamstring our economy with protectionism, but to reduce government spending!

Furthermore, if you believe China will use its greater wealth to challenge US interests military, then that’s fine. I’m not attempting to address their political or military motivations here. What I am doing is challenging the notion that they are some how cheating us economically, or that trade with China is being manipulated against us. That couldn’t be further from the truth.

China is going to grow economically whether we like it or not. Their population is several times larger than ours, providing them that much more labor to tap. The reason we remain a wealthier country despite this disparity is our free economic system. One important characteristic of this system has been free trade. Let’s not start hacking away at the principles that have made us so prosperous in a futile effort to stop anyone else from becoming so. But if you’re still fearing the growth of China, then let me help you get a head start on the next big economic threat: India will surpass China in population by 2025.

Cross-posted at Conservative Compendium.

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Chinaeconomic growthfree tradeprotectionism

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