Just when you have a pretty good sense of who is dishing protectionist nonsense and from where, along comes Robert Aliber, who -- according to the byline of his commentary in yesterday’s Financial Times -- is professor emeritus of international economics and finance at the University of Chicago. Et tu, Chicago?
Aliber considers the US-China trade imbalance unsustainable and, because the Chinese government continues to prevent the value of its currency from rising sufficiently, proposes that the United States impose an across-the-board duty of 10 percent on all Chinese imports, which (after 6 months) would ratchet up 1 percentage point per month every month until the Chinese trade surplus with the United States declines to $5 billion per month.
We've heard this tune before -- but from politicians who are presumably far less adept at economics than a University of Chicago economics professor ought to be. Yet, even Chuck Schumer ultimately acknowledged the banality of his (and Lindsey Graham's) thrice-introduced legislation to impose a 27.5 percent tariff on Chinese imports as a proxy and incentive for renminbi appreciation.
If Aliber limited his argument to the assertions that the bilateral imbalance is unsustainable and that the Chinese government should allow the value of the renminbi to be determined by supply and demand, I'd have much less to quibble with. I'd still be plenty skeptical that bilateral trade accounting tells us anything meaningful in this age of cross-border investment and transnational production and supply chains. I'd still break from the implication that balanced trade should be an objective of policy or that it is more important than economic growth. And I'd still remain unconvinced that an increase in the value of the renminbi alone would have much of an impact on bilateral trade flows. But I'd agree that a market-determined exchange rate would increase the likelihood that investment, consumption, and production decisions would better reflect underlying conditions in labor, financial, and goods markets, and in that regard would be a more useful guidepost for informed decisionmaking.
But Aliber's proposal -- and the numerous fallacies upon which it is predicated -- goes well beyond that point, and appears to be the product of something like acute tunnel vision. He is so fixated on the bilateral trade account that nothing else -- including the impact of his proposal on the economy broadly -- commands his attention.
Aliber utters all of the classic fallacies about the insidious impact of China's currency on U.S. manufacturing; the leverage and sway China allegedly holds over U.S. policymakers, as our banker of last resort; and, how China caused our trade deficit by purchasing U.S. securities. I disagree with all of those assertions, vehemently, and have explained why in various places, but I want to focus presently on his proposal, which is one of the worst ideas in circulation.
Consider this passage, which Aliber apparently considers evidence of the cleverness of his plan (but really exposes its inanity):
Because many Chinese exports contain large amouts of embedded imports, the 10 per cent import tariff in effect is a tax of more than 30 per cent on Chinese value added. With electronics and other high-tech exports, where the import content may be 70 or 80 percent of their value, the 10 per cent tariff might be equivalent to a tax of 60 or 80 per cent on Chinese content.
Neat. But isn't the fact that Chinese exports contain so much import content enough to soundly reject Aliber's plan in the first place? Has he forgotten that we don't import dangling Chinese value added? What we import are products, some of which comprise 20 percent Chinese value added, some 80 percent, and according to the most recent research, an average of about 50 percent Chinese value added. And what does that mean?
It means that on average 50 percent of the value of components, raw materials, and labor embedded in the typical cargo container from China unloaded in Long Beach, California is other countries' value added. It means that slapping a duty on imports from China is the same as restricting imports from countries indiscriminately (I know, non-discrimination is what the GATT/WTO rules are all about, but you get my point). It means restricting our own exports to China, which are embedded in the "high-tech" products that we import from China. (High tech is in quotes because the category consists mostly of computers and electronics, like cell phones and iPods, but protectionists like to exaggerate the security angle of our alleged trade follies by pointing to a bilateral deficit in "high tech," even though Chinese value-added in those goods is well below average, and our imports of them support high-paying U.S. jobs).
Having obviously not read my new paper, Aliber still sees global commerce as a competition between "Us" and "Them." He writes: "It should not take long for the Chinese to learn that they are much more dependent on access to the US market than Americans are dependent on Chinese goods," and goes on to say that Americans can make those product here or buy them elsewhere. Of course we could get them elsewhere, but the fact that we prefer to get them from China means that there would be costs associated with switching sources.
Aliber is a fixed-pie-kinda-guy who fails to recognize the enormous wealth that has been generated by the elimination of political, trade, communications, and transportation barriers, and the highly stratified division of labor this barrier erosion unleashed. He fails to recognize that Chinese labor and American labor are more often complementary than competing, and that the factory floor has broken through its walls and now spans oceans and borders.
Imposing 10 percent duties on products invented and designed in the United States, consisting of components produced in Japan, Singapore, Thailand, and the United States, consuming Australian minerals in the production process and Chinese labor in the assembly process is akin to taking a sledge hammer to a random station along a traditional production-assembly line. It impedes the production process and raises the cost of bringing products to consumers, inflicting damage that is felt at all nodes in the design/production/assembly/supply chain, including those in the United States.
It means making it more difficult to support higher value-added U.S. manufacturing and service activities because with uncertain or compromised access to lower cost component production and assembly operations in China, it will be more difficult for ideas hatched in American labs to come to fruition in the form of the next gadget or convenience or life-saving device.
China's position as the final point of assembly in so many different supply chains, as evidenced by the fact that 50 percent of the value of its exports to the United States consists of Chinese material, labor, and overhead, means that the impact of currency appreciation on the bilateral trade account is uncertain. A stronger renminbi vis-a-vis the dollar means that Americans should pay more for imports from China, but a stronger renminbi also means that Chinese-based producers/assemblers will pay less for imported raw materials and components, lowering their cost of production/assembly. That cost savings should enable Chinese exporters to lower their prices to American consumers, possibly compensating entirely for the higher renminbi-dollar exchange rate.
Of course, there are plenty of other reasons to eschew Aliber's proposal, not the least of which is the fact that it certainly would be found WTO-illegal and would invite discrimination against U.S. exporters. Considering that increased U.S. exports -- and not just reduced imports -- can help reduce the bilateral deficit, it is curious that Aliber would propose a remedy that would likely curtail U.S. exports. It would also raise costs throughout the supply chain directly, and by introducing enormous uncertainty into the trading system.
Now that he's seen the light, maybe Chuck Schumer should give Aliber a call.