How Capitalism Will Save Us (49 page)

In the Real World,
fair trade
is a euphemism for protectionism. As Drezner acknowledges, it is “impossible” to draw a clear line between the two. In his book
U.S. Trade Strategy: Free Versus Fair
, he writes:

In the Real World, Drezner writes, fair-trade policies end up having the same effect as traditional protectionism—they save the jobs of a politically adroit few, while killing off many more jobs. And they raise prices for consumers:

Like other economic policies that tout “fairness,” fair trade, in the Real World, ends up delivering on that promise only to a politically favored few. Opponents of free trade ignore fundamental principles not only of economics but of Real World common sense. Less trade means a smaller economy—a net loss for workers and consumers. It means less prosperity for most people.

T
rade protectionists have lately targeted China for supposedly undervaluing its currency—making the value of the yuan too low against the dollar. Thus, they allege, imported Chinese products are made artificially cheap, while American exports become more expensive. Before taking office as Treasury secretary, Timothy F. Geithner testified that President Obama “believes that China is manipulating its currency.” The president, he promised, would do all he could to assure that “countries like China cannot continue to get a free pass for undermining fair-trade principles.”
²⁶

In fact, China has done anything but “manipulate” its currency. It has outsourced its monetary policy to the Federal Reserve: the value of the Chinese yuan has been pegged to the dollar since 1994. Both the yuan and the dollar fluctuate according to U.S. monetary policies. To appease U.S. protectionists, China has actually increased the value of the yuan some 20 percent against the dollar in recent years.

Currency protectionists have a hidden agenda: to do their own manipulation by altering currency exchange rates to raise the prices of Chinese imports. Post–World War II trade agreements like GATT prohibit raising the cost of Chinese goods via protectionist tariffs. So fair traders want to pressure China to change the value of the yuan.

This would result in a de facto tax on Chinese products. Chinese exports to the United States would go up in price. The cost of those Chinese socks you bought would go, say, from $2.00 to $2.50. We’d buy fewer Chinese goods. Or the price of those computer motherboards imported from China would increase, driving up the price of American computers. People would be able to afford fewer PCs; the market for Chinese parts would shrink. Result: the U.S. trade deficit would be reduced.

Fair traders can’t accept the fact that some countries have advantages over U.S. producers when producing certain types of goods. It’s a fact of life in the Real World that Chinese goods are cheaper because China’s low-cost labor enables Chinese companies to manufacture products less expensively. But this comparative advantage does not mean the United States is at a
disadvantage
. Remember, trade is about two parties making an exchange based on their respective strengths and capabilities—a trade that provides more benefit to both sides than what would have been possible if no transaction had occurred.

Importing less costly Chinese products may displace some American
jobs in specific sectors of the economy. We’ve already noted that doing so creates jobs in other economic sectors, one of the reasons for low U.S. unemployment and increasing prosperity over the past several decades.

Saving on Chinese products enables American consumers and businesses to make their dollars go further. People—including many on lower incomes—are able to live better. Meanwhile, American companies buying cheaper Chinese-manufactured goods and equipment have more capital left over for investment in new operations and jobs.

Our trade with China also encourages the Chinese to invest here. Did you ever wonder what happens to those dollars Chinese companies get from trading with us? They exchange them for yuan from their own government, which ends up with vast pools of dollars. The Chinese government has to invest the greenbacks somewhere. Their best bet: bills and bonds from the U.S. Treasury, and also U.S. businesses.

Thus, U.S.-China trade not only expands the U.S. economy. It enables China to help underwrite U.S. government spending. Whether some of this spending should be taking place is another matter. But dollars from China ease the burden on the U.S. taxpayer.

Bloomberg News reported that when Hillary Clinton made her first visit to China as secretary of state in February of 2009, she urged China to keep buying U.S. Treasuries, “to help finance President Barack Obama’s stimulus plan.”
²⁷
Mrs. Clinton explained that doing so was essential to both nations’ economies. “It would not be in China’s interest,” she said, if the United States lost dollars vital to stimulating its economy. “We are truly going to rise or fall together.”
²⁸

Ironically, the very same administration that sent Mrs. Clinton to urge China to continue investing in the United States raises the specter of currency protectionism. This is typical of free-trade bashers and other free-market opponents. They have a blinkered view of the workings of the economy. They focus on the destruction that occurs in one sector of the economy and don’t recognize the greater creation also occurring.

Protectionists also fail to understand that currency values are not the fundamental determinant of global trade. Transactions that cross borders, like those between individuals, are about meeting one another’s needs. That’s why changing currency values over the long term have little impact on trade imbalances. Sooner or later, people go back to buying
what they did before. Markets readjust the prices of products to reflect their intrinsic value.

Few people today recall that similar charges of currency manipulation were leveled against Japan during the Nixon administration in the late sixties. The yen-to-dollar ratio at that time was 360 to 1. Today it’s about 100 to 1, a devaluation of almost 70 percent. But the trade deficit between the United States and Japan persists.

The only thing that currency protectionism accomplishes is wreaking havoc in an economy by increasing the supply of money. In the 1970s the Nixon administration thought that devaluing the dollar would improve our trade balance and lift the economy. Instead we got rip-roaring inflation and a chain of ever-more-serious recessions. Unemployment went higher and higher, peaking at almost 11 percent in 1982.

The administration of George W. Bush fell prey to the same misconception. It permitted the dollar to grow weak, thinking that would reduce our trade deficit. What happened? Most of that extra money printed by the Federal Reserve went into housing. The trade deficit was brought down, but at an enormous cost: a momentous housing bubble that produced stomach-churning volatility and the most severe recession in at least thirty years.