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Richmans' Trade and Taxes Blog
Free Trade With China? No, Fair Trade. No Artificial Barriers to Trade
In an editorial entitled “Romney’s Trade Pessimism”, the Wall Street Journal 9/15/2012 criticized Gov. Romney for publishing an ad attacking Pres. Obama for the latter’s failure to deal with our trade deficit with China. In the last twenty years, the U.S. trade deficit in goods and services increased from $39 billion in 1992 to $506 billion in 2011. Our deficit with China in 2011accounted for $280 billion, more than half, costing about 2.8 million jobs. Allowing such a huge deficit to continue is a disservice to the American worker.
Free trade is a policy that assumes that the trading partners are not imposing artificial barriers to imports or subsidies to exports. Thanks to our constitution, there is no barrier to the free movement of goods among the states, the essential condition for an enduring policy of free trade. Free trade advocates often argue that if our trading partner is foolish enough to exchange its goods for our “paper”, why should we complain? The basis for such a statement is that at some time in the future, the debt will have to be repaid and we shall have to have a trade surplus to do it. But with China setting the official value of its currency and employing other mercantilist practices such as tariffs, there are no market forces to produce such a turnaround. In the meantime, the trade surplus country experiences a stimulus to growth in GDP and employment while the trade deficit country experiences a drag on GDP and employment. If one looks at the GDP accounts, one can see why. An excess of imports over exports detracts from GDP while a surplus adds to GDP. In other words, a trade deficit means we are losing jobs.
Our trade deficit with China exists not only as the result of market forces such as low wage rates and taxes but mainly its use of mercantilist policies, principally, barriers to imports, subsidies to exports, and exchange controls. This was dramatized recently by the imposition of a tariff on the importation of luxury autos which forced GM to build a factory in China if it wanted to sell Cadillacs in China. Some economists allege that China is engaged in foreign exchange manipulation. NewYork Times columnist, Prof. Paul Krugman, proposed a tariff of 25% on goods coming from China unless it raised the value of its currency substantially.
Gov. Romney has not indicated what measures he would take to force China to increase its imports from us. My colleagues and I have published an article which recommends a single-country variable tariff, called a scaled tariff, whose rate increases as the deficit increases and diminishes as the trade imbalance is reduced. Some fear this would set up a trade war. But in a trade war, the country experiencing a trade deficit is more likely to gain. If China is rational it will choose to reduce its mercantilist practices. Of course China may be considering trade as a weapon and may be using trade to weaken the U.S. and to gain power for some future confrontation. The latter cannot be ruled out. China imported $1,394.8 billion of goods in 2010, but only $102.0 billion from the U.S. There is little doubt that China imposes tariffs and exchange controls and offers inducements to American firms to produce their products in China to perpetuate a trade surplus with the U.S. Apple is one of many firms that employs about ten times as many employees in China than it does in the United States.
The New York Times and most economists believe in free trade disregarding the harmful consequences. It is not only the American worker that is harmed but the U.S. is being weakened by a free trade policy maintained in the face of trading partners who employ unfair trade practices.
Comment by saimond, 11/23/2012:
Throughout China, free trade is manufactured feasible. Free trade inside China would possible guide creating & also developed countries in terms of less costly toil & less costly products. And the Chinese new year festival as it is too famous is the most revered festival of http://www.allbestmessages.com/new-year/Chinese-New-Year.php
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