Is Chinese trade really free?

Trump's decision to impose tariffs on imported steel and aluminum was done to protect the national interest, in ensuring that America retained the core ability to manufacture high-quality raw materials used in defense and commerce. It's too bad that so many of our manufacturing sectors have been destroyed by "free trade" such that the industrial middle of the country has been hollowed out with ghost towns remaining.

"Free trade" on the Right has become similar to "Global warming" on the Left...that is, they believe in it based on religious convictions and take it as a given, without any further debate needed or wanted. It is "settled science," as they say.

But I've been doing a lot of thinking about free trade, having once been a practitioner of this science, and I must admit to a ton of confusion. Part of my confusion is due to the impressive leadership of Donald Trump, who is making many people rethink some of their core convictions. It may be that rethinking will just end up affirming my prior beliefs, but we must keep an open mind during the inquiry.

So here are some things that are bothering me about the free-trade-with-China arguments.

1. If free trade is so good, and trade imbalances are not harmful, then why don't we want more of it? This is a logic question that is very useful to ask to test the truth and limits of an argument.

For example, we know that taxes are a necessary evil. When you tax something, you get less of it. When you reduce taxes, you get more of it. So if you took our state sales tax of 6% and lowered it to, say, three percent, economic activity would go up and total revenue raised by the state would go down, but by not as much, since part of the decrease in state revenue would be offset by higher sales. If you took this to its logical conclusion and had zero tax, sales would go up even more. People would be making more money and consumers would have more stuff they could buy. But the state would earn zero tax on sales. (The state might make some of that loss up with higher corporate taxes on profits, but not anywhere near what they earned under the 6% sales tax.)

So if the goal is higher economic activity to improve the lives of sellers and buyers, you would eliminate the sales tax. But then you wouldn't have enough government revenue to do the things government does, so you'd either have to raise taxes elsewhere, or you'd have to impose a sales tax. Or, perhaps if you lived in New Hampshire, you might decide to have the government do less and therefore spend less.

So now let's examine the main argument used by economists to justify trade imbalances. They claim that if China sends their shoes to the U.S. and sells them below what American companies can manufacture shoes for, we are all better off. Consumers get shoes for say $10 per pair, which is say one-third what they would have to pay for American-made shoes. So since everyone has to buy shoes, this leaves $20 in every person's pocket to spend on something else, which is great.

In exchange, China gets a piece of paper which is intrinsically worth nothing. So the transaction appears to be a big win for us. And then, at some point, the Chinese will have to spend that $20 in the U.S., otherwise we would be getting the shoes "for free." When that $20 finally makes its way back to our country, it will hire someone who won't be making shoes, he will be making something else, say pizzas. And the money goes to hire that pizza maker and gets reinvested...eventually.

So I have two questions about this mini-economic transaction.

First, if it is such a "no brainer" for us to buy cheap shoes with worthless pieces of paper, why do the Chinese do it? Are they stupid, or are we missing something?

Second, if this is so good, we should want more of it. What would happen if our trade deficit with China keeps growing? Why wouldn't we want it to? After all, we have lots of trees and we can print an unlimited number of dollar bills. Let's say our annual trade deficit were $1 trillion. Or say $2 trillion. What would happen if we imported $2 trillion worth of shoes, cheap plastic toys, and then airplanes, computers, furniture, apparel, appliances, cars, etc., etc., etc. In this scenario, are consumers just perpetually better and better off? Do all Americans just live a life of leisure, with the Chinese making all of our products and our only jobs are at the Dollar-Bill printing presses?

If this is such a great deal, then we should want more of it. But if at some point it is too much of a good thing, we need to know how and why that is true. And then we need to see if that "balance" has already been exceeded by $500 billion annual trade deficits, which is where we are now. Frankly, $500 billion is a lot of money, at least in my book.

2. My next question is whether the Communist dictatorship and total control of their citizens and all that implies makes our trade "moral." Do we want to be economically empowering such a potential and future geopolitical rival which does not share our values for human rights like free speech, free elections, etc.?

3. My next question is whether a centrally controlled economy can somehow use our dollar surplus in ways that do not guarantee long-term reciprocity. What does it mean if the Chinese do not eventually buy a pizza but instead buy other things that don't produce goods? Does that matter? What if they buy pizza companies (or computer companies, or semiconductor companies) instead of pizza pies? What if they buy real estate?

This question is important because when dealing with other free-market countries, I think the assumption is that the free market just works and we don't have to monitor or oversee it. But is that true when stacked up against a centrally planned system which is concerned with long-term goals other than simply "profits?" Is it possible that our free and open system is being manipulated for some other goal of which we are blissfully unaware?

What is the evidence for this concern? It is the fact that the Chinese are more than willing to rack up huge trade imbalances year after year and don't appear concerned. Shouldn't there be thousands of Chinese citizens coming to the U.S. and buying up stuff like mad to bring back home to China? If not, where are those trillions of dollars being kept, and for what purpose? When and how are those dollars going to come back, and could they be spent strategically by the central Chinese government to harm us?

4. It is also possible that our trade statistics are misleading. Perhaps having a foe like China, or even an ally like Germany, buy up our debt, purchase our real estate, stockpile dollars for some future use, are all perfectly fine and can never cause us harm. Maybe by holding trillions of dollars in debt, these countries have become de facto partners with us, and any harm to our economy will also hurt them, perhaps worse. If their dollar holdings were ever somehow seriously harmed, then maybe we have in fact been getting shoes for worthless pieces of paper and maybe millions of Chinese workers who their government has exploited are the victims, not Americans.

5. Having a country like China "dump" their products on the U.S. sounds like good news for consumers. But my understanding of the classic argument against dumping is that over the long term, we end up paying for this activity. When our local companies are driven out of business by "unfair" competition, the dumpers end up with a monopoly and then can raise prices without the former competitors still in business to keep them honest. So have we seen this happen? Are the $10 Chinese shoes being sold for $30 now that there are no American competitors in the market? Or are the $10 Chinese shoes still costing the same because there are Mexican $10 shoes that compete with them?

6. Is it important to build things and to have an industrial workforce and economy? Or can we have a bright and successful society where all of our "products" are imported and what we do is just provide services to each other? Is that a long-term sustainable economic model, and if not, how does it end? Do our dollars simply become worth less and less until companies in China and Mexico no longer need more of them, because we produce nothing they want to buy and "services" are mostly unexportable? What happens then?

Maybe our $10 shoes today turn into $500 shoes tomorrow when our dollars no longer have any purchasing power and we are always trying to buy products overseas in exchange for dollars that nobody wants or needs anymore. This is hard to imagine happening when the dollar is king but if our spend-and-borrow service economy continues with budget and trade deficits approaching $1 trillion each per year, maybe it is an inevitable outcome.

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I would like to hear a reasoned debate among economists with differing perspectives play out these scenarios and explain to me and the rest of the country how we can have perpetual massive trade deficits without any long-term negative consequences.

And I also have to say that like many problems in our country, this has been brewing for many years, even decades. We have a political class encompassing both parties that all seem willing to "go along to get along" for years and years without really making any hard decisions and thinking about the long-term problems of inaction. Trump has effectively called out the Washington "swamp" on a number of these issues with many more in the pipeline. The North Korean nuclear threat is an example, but so is the murder of young blacks in Chicago and the depth of despair in similar American cities due to perpetual inaction by our political leaders. The fact that Mexican and Central American gangs like MS-13 have been able to operate in this country is truly remarkable. Trump is not tackling the spending and borrowing problems yet, perhaps because he wants to try to grow the economy first and bring back the manufacturing base. But this is another looming issue that may perhaps eclipse the others if not solved, and soon.

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