An Economic Doomsday Machine

“Bush, Hu smile, pledge cooperation, but make little progress,” read the apt Associated Press headline describing Hu Jintao’s visit to the U.S. last week. Indeed, behind the speeches, photo-ops, pomp, pageantry, and protesters was a fundamental tension and conflict on a variety of issues including human rights, North Korea, and, of course, the elephant in the room: Chinese trade policy. But despite our disagreements, it is important to remember that economic protectionism is not the answer.

As more and more items say “made in China” on them, the shrill voices of protectionists have grown ever louder. Upset that jobs are ostensibly being lost to China’s abundant supply of cheap labor and unorthodox currency policies, politicians, lobbyists, businesses, and others are trying to find ways to “level the playing field.” Among the efforts are those which attempt to exact revenge via economic weapons—most recently, for instance, Senators Lindsey O. Graham and Charles E. Schumer ’71 proposed a 27.5 percent tariff on all Chinese imports until the Dollar-Yuan exchange rate adjusts and American products become more competitive.

Though our $202 billion trade deficit with China is unsustainable and must be dealt with, the lessons of Ec10 must be heeded. Although trade barriers may boost domestic industry and lower the unemployment rate in some sectors, they choke off the flow of cheap imports into the U.S. The increase in the cost of living far outweighs the gains made by keeping uncompetitive businesses afloat. In other words, though a seamstress may have lost her job to China, everybody’s getting cheaper clothes. The onus is on policymakers to help the seamstress make a seamless transitions to a competitively sustainable job.

Unfortunately, the gains of free trade are enjoyed by the masses and go relatively unnoticed, while the losses fall on a concentrated, vocal few. Though the needs and concerns of those who are being hurt should be recognized and dealt with, politicians should look at the big picture of what is best for the United States rather than what is best for any particular sub-constituency.

The arguments against protectionism extend beyond the theory of comparative advantage—China and the United States are so economically intertwined that we are in a situation akin to an economic version of Dr. Strangelove. Although China takes some of our manufacturing jobs, it quenches our thirst for cheap goods by buying large amounts of Treasury Bills that finance our debt and keep interest rates low. Some economists worry that if and when China and its Asian neighbors stop buying our debt, the economic results will be catastrophic. Both sides have an incentive to cooperate economically because each side has so many bargaining chips that playing bets and threats could bankrupt everyone.

Hu’s visit, though largely ceremonial, is an opportunity to reconsider our policies towards China. Experimenting with protectionism is like playing with economic matches—a foolish policy to pursue when global stability is at stake.