Protectionism: What the ….

The US is pushing to start introducing duties on Chinese goods to make a “level playing field” given the currency “misalignment.

Hold up a second.  China maintains a “low” exchange rate by “saving” too much – and using that savings to do things like by US currency and bonds right.  Any subsidy on Chinese exports is “implicit”.

If  this is indeed the case, introducing duties is not the way to go about things – and by ignoring the central issue it will at best lead to an uncomfortable situation and poorer US consumers, and at worst will lead to a full scale trade war and a severe economic crisis.

If you think that having China save excessively creates risks to your own economy (as that sort of subsidy actually sounds pretty welfare enhancing in a direct sense – so we need to think about risks), then deal with it directly – eg by taxing capital flows from that specific country.  Don’t start rubbish protectionism.

  • http://ordinary-gentlemen.com/ James K

    If you think that having China save excessively creates risks to your own economy (as that sort of subsidy actually sounds pretty welfare enhancing in a direct sense – so we need to think about risks), then deal with it directly – eg by taxing capital flows from that specific country.

     
    But those capital flows are the Chinese government buying US Treasuries i.e. propping up the US government’s deficit spending, so they can’t exactly tax it, now can they?  And so the US government engages in unwise protectionism while blithely ignoring the fact they they are responsible for enabling the trade imbalance in the first place.

    • http://www.tvhe.co.nz Matt Nolan

      They do enjoy ignoring that issue – that is true. 

      However, I’m very unhappy with the idea of protectionism

      • http://www.ordinary-gentlemen.com/ James K

        I’m just as unhappy as you are, I guess I’m just more jaded about it.  I stopped hoping the US or EU would be sensible about trade a years ago.

  • Phil Sage

    Matt
    I read recently (Economist I think) that China pays its exporters in newly printed Yuan and then sterilises that by immediately buying China treasury stock.
    http://economistonline.muogao.com/2010/09/chinas-real-sin-is-not-currency-manipulation.html

    It is a choice of rubbish protectionism or playing with inflation by printing money.  Of the two it is difficult to decide which is more dangerous.  At least the protectionism is up front and can be stopped easily.

    • http://www.tvhe.co.nz Matt Nolan

      “It is a choice of rubbish protectionism or playing with inflation by printing money.”

      That is not the choice at all.  The choice is protectionism now, and a higher chance of another global recession, or no protectionism now.

      I don’t like China’s trade policy either – but trying to “fight a trade-war” instead of dealing with the real issues in the domestic economy is just straight bad policy.

  • JC

    “Mr Smoot.. meet Mr Hawley.”
    Like the Europeans, the Democrat controlled Senate has run out of ideas, and all thats left is a gamble for political survival.
    JC

    • http://www.tvhe.co.nz Matt Nolan

      Lets hope it doesn’t come to that