Friday, December 02, 2011

We Should Thank China for Its Currency Policy

When you hear discussion of China’s currency manipulation, keep the following in mind:

1. China's currency manipulation is a form of foreign aid, and to the direct advantage of millions of U.S. consumers, especially low-income groups, and to the direct advantage of thousands of American companies buying inputs from China.

2. Forcing China to revalue its currency would benefit some American manufacturers competing with China, but would significantly harm those American consumers and businesses currently buying undervalued imports. On net, there would be more harm to American consumers than benefits to American manufacturers, which would reduce our overall standard of living.

3. Like other forms of mercantilism and protectionism, forcing or pressuring China to appreciate its currency would favor certain domestic producers over millions of consumers and import-buying companies, but would make the United States worse off, not better off.

4. Finally, instead of complaining, we should be thankful for China's foreign aid to Americans through an undervalued yuan, overvalued dollar, and undervalued goods that collectively save American consumers and companies billions of dollars every year.

Bottom Line: If you wouldn't object to China sending products to the United States for free, then on what basis would you object to currency “manipulation” that allows you to purchase undervalued Chinese imports at a huge discount and great bargain?

Excerpt from my article "Why We Should Thank the Currency Manipulators" at The American.

Update: Thanks to Don Boudreaux for the link, who also links to Bastiat's famous "Candlemakers' Petition," which gave me an idea for another way to make the argument about China's "currency manipulation":

1. If you wouldn't object to getting free light from the sun (even though that reduces output and employment for some domestic producers of candles, lights, lamps, lightbulbs, flashlights, electric utilities, etc.), then you likewise shouldn't object to getting free, or greatly "undervalued" goods from China as a result of its currency manipulation in favor of Americans purchasing Chinese imports.

2. If you think that China should be forced or pressured to revalue its currency to the advantage of U.S. companies competing with China, then you must also agree with Bastiat's facetious appeal to the French parliament advocating trade policy to protect the French candlemakers against the "ruinous competition of a foreign rival," which is none other than the sun:

"We ask you to be so good as to pass a law requiring the closing of all windows, dormers, skylights, inside and outside shutters, curtains, casements, bull's-eyes, deadlights, and blinds—in short, all openings, holes, chinks, and fissures through which the light of the sun is wont to enter houses, to the detriment of the fair industries with which, we are proud to say, we have endowed the country, a country that cannot, without betraying ingratitude, abandon us today to so unequal a combat."

44 Comments:

At 12/02/2011 8:42 AM, Blogger W.C. Varones said...

If you wouldn't object to China sending products to the United States for free, then on what basis would you object to currency “manipulation” that allows you to purchase undervalued Chinese imports at a huge discount and great bargain?

If they sent us products for free, we wouldn't owe them a trillion dollars.

Please see the parable of the plastic duck junkie.

 
At 12/02/2011 9:31 AM, Blogger Simon Lester said...

Would you characterize a government's action to keep its currency undervalued as "protectionism"? That is, such an action gives domestic producers an advantage over their foreign counterparts?

If so, are you arguing that foreign protectionism can be good for Americans?

 
At 12/02/2011 9:34 AM, Blogger morganovich said...

"If they sent us products for free, we wouldn't owe them a trillion dollars."

nonsense.

this whole line of reasoning is completely untrue.

think about it.

you buy a cell phone from china. you pay cash. who owes anyone anything?

nobody.

even if it is the only trade an american does with china all year and is thus a "trade deficit", there is still nothing at all owed.

your claim is like saying you owe the grocery store money because you buy groceries from them and they never buy anything from you.

the federal government owes china money, but this is NOT due to trade. it's due to deficits. they cannot balance their budget. debt comes from spending more than you earn, not from trade.

if china had not bought that debt, someone else would have had to and, without china's demand for bonds, would have paid less, driving up US interest costs.

what you are really objecting to is chinese subsidization of the US federal deficit, which is pretty absurd when you think about it.

 
At 12/02/2011 9:39 AM, Blogger morganovich said...

"That is, such an action gives domestic producers an advantage over their foreign counterparts?

If so, are you arguing that foreign protectionism can be good for Americans?"

you make a jump here that does not make sense.

sure, keeping a currency undervalued acts like protectionism, but how is that a benefit to the imposer? it's not.

like all protectionist policies, it results in a net deadweight loss in real terms to the imposer.

how is increasing prices for your citizens while limiting their selection a benefit?

sure, a few producers may reap benefits, but that is always exceeded by the loss to consumers.

this graph shows why it must always be so:

http://mjperry.blogspot.com/2011/03/econ-101-protectionism-for-dummies.html

thus, your conclusion does not follow from your premise.

undervalued currency is protectionist, but it crates no net benefit to the imposing society.

 
At 12/02/2011 9:54 AM, Blogger Simon Lester said...

Let me try to make my question more clear: Is Chinese protectionism good for Americans?

 
At 12/02/2011 10:13 AM, Blogger VangelV said...

Bottom Line: If you wouldn't object to China sending products to the United States for free, then on what basis would you object to currency “manipulation” that allows you to purchase undervalued Chinese imports at a huge discount and great bargain?

LOL...Just watch. You would be surprised with the silly responses that you get. They will be exactly the same ones that you got the last time this issue was discussed.

 
At 12/02/2011 10:27 AM, Blogger rjs said...

the federal government owes china money, but this is NOT due to trade. it's due to deficits. they cannot balance their budget. debt comes from spending more than you earn, not from trade.

in a way, it is due to trade; you should do some reading on sector balances; here's one:

http://neweconomicperspectives.blogspot.com/2009/07/sector-financial-balances-model-of_26.html

 
At 12/02/2011 10:28 AM, Blogger Duncan said...

It is ironic that the repressive communist regime is supporting the value of our currency (a measure of our national wealth and standard of living), rewarding those that have saved dollars and now can spend, while our own government wants to debase our currency and punish all savers with negative real interest rates and inflation on things that matter, food, energy, medical care, eductions.

 
At 12/02/2011 10:34 AM, Blogger morganovich said...

rjs-

that piece seems irrelevant.

the us federal government would not owe anyone anything if it didn't spend more than it took in.

trade is totally orthogonal.

if the feds buy from china, again, this creates no debt if they do it with money they have.

it's spending money that they don't that creates debt.

if they spend a trillion dollars they do not have and issue a trillion in bonds to cover it, they should be thanking the chinese for buying them and keeping rates lower than they would otherwise be.

your argument doesn't make any sense.

 
At 12/02/2011 10:35 AM, Blogger morganovich said...

simon-

sorry, i may have misunderstood you.

yes, chinese protectionism in the form of an undervalued currency does benefit americans.

that was the whole point of mark's piece.

 
At 12/02/2011 10:43 AM, Blogger Buddy R Pacifico said...

If one argues for open markets then: one can not argue for free goods from closed markets because...

at the least, there are costs for these free goods, and one is those goods come from continuing closed markets.

Take a stand and declare -> free markets > free goods from closed markets.

 
At 12/02/2011 10:43 AM, Blogger morganovich said...

duncan-

rather than "ironic" i'd just call it a difference in priorities.

the chinese government is looking to shore up exporting businesses at the expense of consumers because they think it boosts GDP.

it's some kind of weird cargo cult thinking. they look at GDP, hear it's good, and seek to boost it, but like tribesmen building fake boats to hopefully bring more shiny items, they have misuderstood what it really is and what the point is supposed to be.

growth is good because it benefits people, but they do not see it that way. they pursue growth purely for its own sake, thinking that building a new skyscraper or stadium that will stand empty is a priori good because it ups GDP and have lost sight of the fact that it has little value.

the US, on the other hand, has similar cargo cult leanings, but in a different direction. our government seeks to increase consumption at all costs and get people to "spend money" at the expense of all else losing sight of where the money to spend comes from.

they encourage debt and running down our personal balance sheets to drive GDP from C, not I, but it's a similarly myopic and incomplete view of the economic picture.

 
At 12/02/2011 10:50 AM, Blogger Simon Lester said...

morganovich,

So let's say that China (or some other country) really wants to have a steel industry. Unfortunately, they are terribly inefficient at producing steel. So, they subsidize it massively, and as a result much steel production shifts from efficient producers elsewhere to inefficient producers in China.

Taking that into account, is it possible that overall economic welfare, as well as economic welfare in former steel producing countries, will fall due to these subsidies?

 
At 12/02/2011 11:15 AM, Blogger juandos said...

"Taking that into account, is it possible that overall economic welfare, as well as economic welfare in former steel producing countries, will fall due to these subsidies?"...

Sure its possible...

Still if buyers of steel have certain minimums they absolutely require in steel product and Chinese steel quality can't meet the minimums those buyers will have to go else where for more expensive but higher quality steel...

 
At 12/02/2011 11:16 AM, Blogger VangelV said...


Taking that into account, is it possible that overall economic welfare, as well as economic welfare in former steel producing countries, will fall due to these subsidies?


No. The benefit that comes from having access to the much cheaper steel will be much greater than the harm done to the less efficient producers who will go out of business.

 
At 12/02/2011 11:21 AM, Blogger Walt G. said...

China would have to pay me a lot of money to install their steel gas pipe in houses again. I have over 30 years of installing United States' ASTM 53 pipe with no leaks at all and I have had six pipe leaks from Chinese ASTM 53 pipe in the last two years.

The Chinese pipe is labeled as meeting our standards, but it appears either the standard is too low and the US pipe has been exceeding the standard over the years or the Chinese pipe does not meet the standard and is marked that it does anyway. I've asked around and other installers have found the same problem, so it is not just me having this problem. We are finding the same type of problem with gas valves from India that will not shut off 100%.

Two of the pipe leaks did not happen until a couple of weeks after the installation, so they leak tested just fine, but the customers started smelling the gas and called me. Do you want me to pipe gas into your house with Chinese pipe to save you $10.00 or $20.00? Bargains are not always bargains.

 
At 12/02/2011 11:31 AM, Blogger Benjamin said...

With global supply lines, the arguments about "supply-side" economics become very muddied.

Perry is effectively arguing that we only need to print money to boost our economy, and I think Perry is right. The Chinese and others are willing to take our money, as we print it.

We print more, import more, and US workers become employed in importing activities. Our standard of living is higher, while inflation is kept in check by the global supply lines.

 
At 12/02/2011 11:33 AM, Blogger morganovich said...

buddy-

"at the least, there are costs for these free goods, and one is those goods come from continuing closed markets.

Take a stand and declare -> free markets > free goods from closed markets."

this seems like a false dichotomy.

belief in freedom includes allowing others to do dumb things.

if you play poker and take money from a guy who consistently draws to an inside straight, that's not incompatible with a belief in "good poker".

we cannot tell china what to do, only ourselves.

we play our game, they theirs.

part of doing good business is taking advantage of opportunities others provide.

what is you you propose here? close our own markets and make the same mistake they do until they remedy it?

that's like saying i'm going to punch myself in the face until you stop punching yourself in the face.

 
At 12/02/2011 11:36 AM, Blogger morganovich said...

"Taking that into account, is it possible that overall economic welfare, as well as economic welfare in former steel producing countries, will fall due to these subsidies?"

no.

this is basic ricardo.

even if we have comparative advantage in every good, we can still trade with inferior producers and get a larger production possibility frontier worldwide.

the drop in welfare you posit does not exist.

see if this helps:

http://iang.org/free_banking/david.html

 
At 12/02/2011 12:43 PM, Blogger Buddy R Pacifico said...

Walt, the same situation exists with copper pipes from China. I will not allow Chinese copper pipes to be used in any of my properties. I do not prohibit all Chinese made products, but their piping frequently fails.

 
At 12/02/2011 12:57 PM, Blogger Buddy R Pacifico said...

morgan states:

"we cannot tell china what to do, only ourselves.

we play our game, they theirs"


That is right, but if you argue for free markets then acknowledge that Chinese goods are not free. A basic cost is the loss of free markets in China. Right?

You give up free markets for foreign producers in China.

 
At 12/02/2011 1:10 PM, Blogger morganovich said...

buddy-

"That is right, but if you argue for free markets then acknowledge that Chinese goods are not free. A basic cost is the loss of free markets in China. Right?

You give up free markets for foreign producers in China."

i cannot figure out what you are trying to say.

this doesn't make any sense.

are you trying to say that if you like free trade for the us, you should like them for china?

sure, that's true. if i were looking to benefit china, i would certainly advocate that they adopt free trade and let their currency float, as, i'm sure, would mark.

that's not the point of his piece.

he is responding to the constant uniformed populist claims that china's weal currency somehow hurts the US, which is totally untrue. it helps the US. it's bad for china, but to claim that our benefiting from their subsidizing our purchases is indefensible. there is just no truth to it.

let's go back to the poker example.

i may play badly, and you well, but your continuing to take my money as a result is not any more incompatible with your belief in good poker than the us continuing to benefit from china's monetary errors is incompatible with seeking to trade well and maximize US welfare.

if this is your argument, then you are misconstruing mark's. he's not saying china's currency manipulation is a good idea for china, only that what they are doing actually winds up hurting them and benefiting us.

 
At 12/02/2011 1:14 PM, Blogger morganovich said...

here is maybe a simpler way to think about it:

you and i play poker.

i keep drawing to inside straights and am losing consistently to you as a result.

what do you do?

do you demand i stop doing it because it's harming you?

that would be absurd.

that is literally the equivalent of telling china to let its currency appreciate because the cheap goods are harming us.

mark's whole argument is that china would be better off if they stopped this behavior and that claims of its harm to us are absurd.

there is nothing at all inconsistent in that.

 
At 12/02/2011 1:37 PM, Blogger morganovich said...

"Perry is effectively arguing that we only need to print money to boost our economy, and I think Perry is right"

um, no, that's not what he is arguing at all.

he is arguing that we benefit from low prices.

that's the opposite of what you are saying. if we print money and debase the currency, then the dollar falls and the prices of imports rise, causing harm, not benefit.

you have this completely backwards.

i have no idea where you get this stuff bunny.

 
At 12/02/2011 1:56 PM, Blogger Marko said...

Buddy, let me try another way:

China has this policy, and some people (populists mostly) argue that this policy is bad for the U.S. Their solution is to fight back in kind.

MP is pointing out, and many of us believe, that the policy in China is actually helping the U.S., even if it is hurting China. If we were to adopt the same policy, all we would do is hurt ourselves, and maybe help China. That is the argument.

The policy in question limits free trade. There is nothing inconsistent in arguing that China's lack of free trade helps the U.S. (and hurts China) and saying that free trade is good. Tarifs and export subsidies hurt the country that does that, and sometimes help other countries. That is an argument FOR free trade, not against it!

 
At 12/02/2011 1:56 PM, Blogger Buddy R Pacifico said...

morgan,

"mark's whole argument is that china would be better off if they stopped this behavior and that claims of its harm to us are absurd.

there is nothing at all inconsistent in that."


I claim, the harm is market openings that have receded, and that is harm for foreign producers in and out of Chinese markets. Certainly the notion of free goods is mistaken, because greater markets mean greater prosperity and not the inverse.

BTW,
I believe the yuan would fall under the value of the dollar, within a year of a yuan forex. Let the market decide this. Markets in everythin.

 
At 12/02/2011 2:02 PM, Blogger NormanB said...

China's currency minipulation is modern day from of slavery. Slavery is where a power element makes other people perform tasks either totally against their will (as in kidnapping girls for prostitution) or paying them less than they should be earning (Africans in the US).

Its the latter that the Chinese use. For instance, an IKEA sofa in Bejing costs $1,250 vs $750 in the US. Thus, the Chinese people by definition are working for less than they should be getting otherwise why shouldn't they pay $750 for that sofa?

We in the US then are almost like slave-holders in that we get the benefits of this slave state though we don't do the slaving. This is not unlike Europeans who got the work of slaves by buying out cotton, tobacco, etc at prices below what they could grow it for themselves.

Further, this currency hammer against the people of China could also be consdiered as a hidden tax as the government of China is taking the money that should be going to its people and building its foreign reserves for future expansin and its coffers to build up its army.

The accounting debit/credit equation holds: We get the credits and the Chinese people get screwed. Is this long term viable? Is it proper? No and No.

 
At 12/02/2011 2:03 PM, Blogger Marko said...

Put even more simply, MP is pointing out that China's policy is helping the U.S. overall, so there is no reason to "fight against it."

That is a pretty limited statement. He could add, and I would add, that both the U.S. and China would ultimately be better off if they adopted free trade, but if they are sending us money (by way of cheaper goods), why are we complaining?

I just want to shout out to the world - "lower cost goods help the poor! How can you be against that?" Sheesh.

As to the quality issues, those are a good point, and it seems to me to be a different issue. If you are getting the same quality goods for cheaper (which is what China is doing with their subsidy), that is good. In addition to that, some chinese produced goods are lower quality and also less expensive. If China stopped the subisdy, the cost of the shoddy Chinese pipe would go up, but it would still be shoddy. Are you guys arguing that cheap crap from China should be more expensive? How would that be better?

 
At 12/02/2011 2:11 PM, Blogger Marko said...

NormanB - you raise a good moral point. China is doing something wrong - it is taking what amounts to taxes from the people of China and sending it to the U.S. We can complain on moral grounds on behalf of the Chinese people, but we can't complain that this is somehow hurting our economy. This claim is often made, and MP is showing why that is false. It may be bad for certain U.S. manufacturing centers, and for certain labor unions and workers, but it is overall very good for U.S. consumers, which is pretty much everyone in the U.S. None of that argument is hurt by pointing out that this hurts Chinese people, since that is not what MP is defending against.

Now if you want to talk about what helps the Chinese people, do you think they are better off earning very low wages, or none at all? I would argue that they would rather have a little than nothing. If the U.S. stopped buying chinese goods, they would go from having little, to having less. Not sure if that helps them - you can decide with your own purchases.

Another quick point - manufacturing and producing products is a COST, not a benefit. If China sends us free goods, and that puts production out of business here, that is ultimately a good - wealth is the good we want, which is produced by lower cost goods. Production is a cost, and you are better off is someone else does it, especially if it is free. If you disagree with this, ask yourself why you are not a subsistence farmer!

 
At 12/02/2011 2:13 PM, Blogger Jet Beagle said...

Norman B: "Slavery is where a power element makes other people perform tasks either totally against their will (as in kidnapping girls for prostitution) or paying them less than they should be earning (Africans in the US)."

That's not true at all. "Paying them less than they should be earning" would only be slavery if the workers were forced to work. If an employer offers a wage, and the Chinese worker or the African American worker accepts that wage, there is no enslavement.

 
At 12/02/2011 3:00 PM, Blogger Simon Lester said...

morganovich,

you're thinking of absolute advantage. one country can't have a comparative advantage in every good.

and that's the point. under your argument, China is producing goods in which does not have a comparative advantage. isn't there a welfare loss from that?

 
At 12/02/2011 3:03 PM, Blogger Che is dead said...

JetBeagle,

Perfectly on point. NormanBs other cliam that "We in the US then are almost like slave-holders ..." is another leftist trope.

 
At 12/02/2011 3:05 PM, Blogger morganovich said...

simon-

"isn't there a welfare loss from that?"

no.

read the ricardo link i gave you.

there is no such thing as not having comparative advantage.

it's based on the ratio of inputs to output relative to one another for goods in a single economy compared to the ratio of another.

if the us can make guns for 2 and butter for 4 and china can make guns for 4 and butter for 12, it still makes sense to specialize as it will up the production possibility frontier.

because the ratio of inputs for butter/guns is 2 in the us and 3 in china, they should make guns and the us butter.

china has comparative advantage in guns even though they are a worse absolute producer of both commodities and their is a net gain to the global economy from this specialization, not a loss.

 
At 12/02/2011 3:06 PM, Blogger morganovich said...

"That's not true at all. "Paying them less than they should be earning" would only be slavery if the workers were forced to work. If an employer offers a wage, and the Chinese worker or the African American worker accepts that wage, there is no enslavement."

to amplify this, should is a subjective term. who decides should? that is not the same at all as "could".

 
At 12/02/2011 3:11 PM, Blogger morganovich said...

This comment has been removed by the author.

 
At 12/02/2011 3:27 PM, Blogger Simon Lester said...

Let me try one more time. One country can't have a comparative advantage in everything. Let's say they use subsidies to produce something other than where their comparative advantage lies. In other words, they specialize in something they are relatively bad at producing. Isn't there a welfare loss in that?

 
At 12/02/2011 4:44 PM, Blogger Che is dead said...

"Is that what economics students learn at Michigan/Flint -- that subsidizing exports leads to greater efficiencies in international markets??" -- Ed R

No, they are learning that cutting your nose off to spite your face only makes you both stupid and ugly.

 
At 12/02/2011 5:55 PM, Blogger PeakTrader said...

Be thankful for the free goods and free money.

They sell too cheaply. So, we buy too much. Then they loan too cheaply. So, we borrow too much.

It's a virtuous cycle of U.S. consumption-investment.

 
At 12/02/2011 6:51 PM, Blogger sethstorm said...

Unfortunately you have it the wrong way around, Mr. Perry. You want to portray consumers as either innocent and pure as the driven snow, or justifiably voracious - depending on the situation. Either way, you use it as a way to malign US citizens by pitting them against other US citizens, never to defend them.


The more thankful action would be to take China to task for their junk subsidy and slap a large tariff that not only applies to them, but to various other Third World countries. Consider it a tariff on despotic countries (as well as any US-side transplants associated with them) that dynamically assigns a tariff that puts the cost above the US.

As for the Bastiat "example" - he, you, and Don Boudreaux are comparing apples to rocks. They both might be round and solid, but not even close to being the same.

 
At 12/02/2011 7:50 PM, Blogger Sean said...

No, we shouldn't send tanks to ... oh. Nevermind.

 
At 12/02/2011 7:50 PM, Blogger juandos said...

"Unfortunately you have it the wrong way around, Mr. Perry. You want to portray consumers as either innocent and pure as the driven snow, or justifiably voracious - depending on the situation. Either way, you use it as a way to malign US citizens by pitting them against other US citizens, never to defend them"...

Oh dear! Let sethstorm use your money so he can shop for you using his clever protectionist methods...

 
At 12/02/2011 8:19 PM, Blogger sethstorm said...

This comment has been removed by the author.

 
At 12/02/2011 11:22 PM, Blogger juandos said...

"It's no less valid this time"...

The problem sethstorm your viewpoint hasn't ever been valid...

 
At 12/03/2011 3:20 AM, Blogger Ron H. said...

"Bringing out your tired excuse again? It's no less valid this time."

What? Doesn't that mean it's valid?

 

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