Trade intervention is good or bad??

Michael Pettis reminds us part of the political conversation is pretty much missing from the election cycles of the last fifteen years except in the rather lightly noted passage of ‘trade treaties’. (Another post is needed for the most recent three examples…).

Last week’s Senate bill on Chinese currency intervention predictably enough brought out all the same old arguments about international trade, and just as predictably has hardened the opposing positions in the debate. Unfortunately the difference between a good outcome, intelligently negotiated, and a bad outcome, is pretty large, but with each side hardening its position the likelihood of a good outcome is declining.

The biggest problem with the debate, I think, is the muddled thinking and half-baked arguments….

(Dan here…both sides of the rhetoric is what he means I believe, since it is not a debate. Go to his post for more complete coverage.)

I will highlight the criticism that current imports (lower cost?) are almost always a good thing. (Bolding is mine). The quote Michael is responding to is at the end of the post.*

For their first point, we should be clear. Tariffs will hurt the pocketbooks of American households as consumers, but not as workers. If there is a positive impact on employment, under conditions of high unemployment households are likely to be better off, not worse off, if there is a resulting contraction in the trade deficit, even if the cost of consumption rises. This is just arithmetic.

So the key question is whether actions taken by the US can cause the trade deficit to contract and with it US unemployment. This is where their second point comes in. The USCBC says there will be no domestic employment impact – which also means that it will cause no contraction in the current account deficit – because any reduction in exports from China will merely shift the US trade imbalance to countries like Vietnam, Indonesia and Mexico.

Others make the same argument. David Pilling, for example, someone with whom I usually agree, in Thursday’s Financial Times says:

Even if Chinese exports do become less competitive, jobs are unlikely to flock to high-wage economies such as the US. Rather they will tend to go to other low-wage ones such as Bangladesh, Vietnam, Indonesia and Mexico.

But no. As I have pointed out many times, this argument is wrong for at least two reasons. The first reason is the implicit claim that there is no overlap between US production and Chinese production – it assumes that the US produces, or can produce, none of the things that China exports. This is clearly and demonstrably false.

The second, and much more important, reason is that this argument implicitly assumes that changes in trade flows only have first order impacts – in other words if a Chinese textile exporter loses his American client to a Mexican exporter, there will be no further economic impact on the US trade account. This, of course, is nonsense.

The US-China Business Council, for example, issued a release on October 12 that exemplifies one of the major misunderstandings on trade. I realize that the USCBC is primarily an advocacy group, and so their arguments are aimed at supporting a position rather than adding to the debate, but I wonder if making arguments that are so easily refuted helps their cause.

*Here is what the USCBC said in their October 12 release.

USCBC believes that the currency legislation passed yesterday by the US Senate will do more harm than good. USCBC continues to advocate that China needs to move faster toward a market –determined exchange rate; passing tariff legislation on imports from China will not get us closer to this goal and will hit the pocketbooks of American households at a time they least can afford it. Limiting imports from China would not mean an increase in US employment or lower the trade deficit; we’ll just shift our imports to another overseas supplier. If this is intended to be a jobs bill, it is a jobs bill for Vietnam, Indonesia and Mexico.