Trade Wars Coming Up

I recently read an article about the burgeoning trade war between the United States and China with the introduction of tariffs on solar panels and washing machines.  The author made several points: 

  1. The tariffs were primarily aimed at China and South Korea.
  2. If China retaliates, it could do so by cutting back on its purchase of U.S. Treasury securities, or simply by imposing tariffs on some U.S. products.
  3. That a trade war often follows a failed currency manipulation war and precedes a shooting war.  He went on to say in a related article that:
  4. The law of comparative advantage is wrong (or doesn’t apply) in today’s world.  He complains that a country’s comparative advantage is not static and therefore the law doesn’t apply.

In reply: Who ever said the law of comparative advantage was static?  As circumstances change, so do the efforts of the various participants.  Advantages come and go and can change all the time.  So what?  That doesn’t invalidate the law of comparative advantage.  Countries are still better off producing things at which they are better suited/more competent and trading with other countries for goods that are more efficiently produced elsewhere.

The author goes on to point out how a government might subsidize or nurture a particular industry or business.  Once again, so what?  Nine times out of ten, governments subsidize or protect failing businesses.  Just because some government gets lucky once in a while doesn’t mean that the rest of the world can’t adapt to a changing environment.

Lastly, the author blasts the idea that capital should be allowed to flow freely.  He cites the time Malaysian Prime Minister Mahathir closed Malaysia’s capital account to preserve hard currency and defend the Ringgit’s exchange rate.  In retrospect, he claims that this move save the Malaysian currency.  He believes the real reason open cash flow ideas are promoted is because the Davos elite (without naming them) want to diminish the U. S.’s power and the U.S. dollar and enhance China’s power.  Never mind the fact that capital flows where it is treated best.

Before we go any further with the author’s theories, please note that what the Davos elite wants is irrelevant.  He’s just looking for a scape goat for all the stupid things that the U.S. elite (Congress and past presidents) have done to the U.S. economy to put it into the position it is in today; i.e., to a point where the U.S. dollar is worth a fraction of its former self, to where the corporate tax rate had to be lowered from one of the highest rates in the world in order to stay competitive and allow U.S. companies to bring their cash home.  And of course, there are the trillions of dollars in debt that the federal government, state governments, municipal governments, corporations, students, and individuals have incurred over the years to give us a fragile economy ready to burst with rising interest rate or a trade war.

The author also suggests (hopes) that by imposing tariffs on various manufacturers around the world, that they will be encouraged to move their plants to the United States to create more jobs there (and presumably leave their home countries and cheap labor markets with fewer jobs).  Perhaps the author failed to learn the simple economic truth that we live in a world of limited resources and unlimited wants.  In short, there is competition for those limited resources and that the more people (countries) wake up to this fact, the more friction there will be between the two possible approaches to gaining wealth.  Some countries will trade goods and services based on their comparative advantages.  Others will try to march into other countries and seize the goods they want.  Voluntary trade vs. force.

Where does this leave the consumer?  If he/she is in the United States and he/she wants to buy solar panels or a washing machine, it leaves him/her with fewer choices and probably a higher price tag to look at.  As trade wars spread, the same phenomenon will make its rounds to all corners of the globe.  At some point, hopefully someone will ask, “For whose benefit are these trade wars?  If not the end user, then whom?”  Presumably for the benefit of all the inefficient manufacturers who “need” or want to be protected and the government bureaucrats who enforce the trade restrictions and inefficiencies!  What a waste!

Robert F. Sennholz

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