theophilosophilus's Journal: The threat from China

I've been doing research on the Dormant Commerce Clause for a paper in Constitutional Economic Rights and have been reading a little Adam Smith to get a feel of what the Framers had in mind when they drafted the Constitution. Smith is still relevant today.

Something that irks me is that a lot of people I talk to about economics is the misconception about trade deficits. First, there is not limited money. We are no longer on the gold standard. When we need more money (deflation) or have too much (inflation) the Fed simply raises or lowers interest rates which essentially creates more money on paper. Money is no longer even physical, its just a entry in a collection of computers. Second, a dollar is a promise to provide goods or services in the future. Money has no intrinsic value of its own, its just paper. The only value a dollar has is its capacity to be traded for goods or services. A trade deficit emerges, by definition, when we are getting more goods from a foreign country than they are getting from us. Incorporating our newfound understanding of money, a trade deficit means that we gave a foreign country worthless paper for their goods. Remember, the only time that worthless paper called the U.S. Dollar has any value is when it is redeemed in the U.S. If the foreign country was not cashing in the dollars we gave them then that would mean we are getting free stuff and that a trade deficit is actually a good thing. Unfortunately, trade deficits are a neutral thing. A trade deficit arises when a foreign country does not trade for U.S. products. The foreign country is obviously not stupid enough to refrain from cashing in their dollars, they simply buy services or invest in U.S. assets (foreign ownership of U.S. assets like stock, debt, or property is a different concern). Or a country could trade the dollars to another country for something in return, the result is the same because the dollars eventually need to be redeemed in the U.S. to be worth anything. As Smith said

Money, therefore, necessarily runs after goods, but goods do not always or necessarily run after money. The man who buys, does not always mean to sell again, but frequently to use or to consume; whereas he who sells, always means to buy again.

Third, the reason that the Chinese are not buying U.S. products is that they can't afford them. Products are generally purchased by individuals while companies buy assets. Therefore, its easy to see why the money from trade flows the way it does. The Chinese workers cannot consume U.S. consumer goods because their wages do not allow it. Therefore, in the short run, U.S. manufacturing suffers. However, as Chinese workers specialize the available pool of workers will eventually (in the long run) be constrained. The result will be increased wages and an increased desire for consumer goods, some from the U.S. As Smith said

The desire for food is limited in every man by the narrow capacity for the human stomach; but the desire of the conveniences and ornaments of building, dress, equipage, and household furniture, seems to have no limit or certain boundary.

Fourth, [I will discuss the lessons of the luddites - 19th century workmen who destroyed labor saving technology out of fear of unemployment. The analogy between 19th century fear of technology and 21st century fear of free trade is unmistakable. Slashdotters would do well to recognize their contribution as supporters of technology (like the wheel) to unemployment].
Fifth, [I will discuss the relationship between competition and prosperity. Overall buying power of a worker is not increased by protectionist policies. Take the simple example of a TV assembly line worker. The worker who cannot afford what he produces will remain unable to afford the fruits of his labor under a protectionist regime because his wage will rise in proportion to the product. Now multiply that simple example across every product in the economy under a comprehensive protectionist plan. The advances from a protectionist plan come at the expense of a country's consumers. Workers are consumers and at best any increases in wages or employment can only offset the increase in consumer prices leaving a worker in no better position.]
Sixth, [I will discucss the experiences of Japan and Taiwan and the relation to the new round of 3rd world industrialization and the "catch-up affect"]