As the Republican candidates campaigned in the Midwestern states – states that are suffering from several years of high unemployment, a decade of factory flight to Mexico and China, and more than a generation of increased import competition with industrial and manufacturing decline – they were asked what they, as president, would be prepared to do to alleviate these problems. Because all of these problems will remain mostly unchanged by the November elections, both the Republican nominee and President Obama will want to present a convincing plan to attract votes in these important swing states. Unfortunately, what is being offered as a solution by both parties may attract votes, but is unlikely to be very effective in resolving the underlying problems; in fact, some of the proposed solutions may make things worse.
One problem with political campaigns is that the analysis of a problem and the proposed solution must remain simple enough to capture the support of a wide range of affected voters. Clearly, a notable problem in these swing states is unemployment. One simple explanation for that problem is unfair trade with China. But, why is China unfair?
Well, Mitt Romney says that immediately after becoming president he will brand China a currency manipulator and begin to implement tariffs on Chinese imports. Rick Santorum says he wants to go to war with China and bring American businesses back home. Newt Gingrich wants to raise the pain level on Chinese cheating and intellectual property rights infringement. (See ref here).
President Obama is also using stronger rhetoric against China, perhaps to demonstrate to the opposition that he isn’t going soft on China. In his State of the Union address in January he singled out China as an unfair competitor and set in motion the creation of a new Interagency Trade Enforcement Center to monitor and enforce US rights under international agreements. When things are going wrong at home it is always safe to identify an external threat and blame that for your problems.
Only Ron Paul (and Jon Huntsman before him) has been willing to argue that China creates as many benefits for some Americans as it creates difficulties for others. For example, although a low renminbi value can hurt import-competing businesses in the US, it simultaneously raises the purchasing power and standard of living for low-income Americans, who purchase Chinese-made clothing, toys and appliances. Similarly, the resulting US trade deficit with China allows China to lend trillions of dollars to the US – most going to the US government – thereby enabling the expansion of federal spending and transfers without the need to raise taxes to pay for it. China’s dumping of low-priced products injures competing American firms, but it simultaneously benefits the US companies and consumers who purchase those cheaper products.
It is worth noting that US firms have been found “guilty” of similar infractions on its exports to China. The US government is currently investigating Chinese government subsidies on solar panels and other exported goods, which can have detrimental effects on its own competing firms. At the same time, government subsidies anywhere increases the ability of households and businesses to expand their usage of clean technology. Besides, the US has also subsidized its alternative energy sector and helps promote exports with subsidized loans from the Export-Import bank.
Violations of intellectual property rights is perhaps the strongest complaint to be made against China, although realistically, a solution to these problems will take a long time to become effective – even with the full cooperation of the Chinese government. Although one can argue that the Chinese government should do more, it is not true that they are ignoring the problems.
For every Chinese action the US complains about, there is an offsetting, and unmentioned, US beneficiary from that same action. Unfair trade with China is as much an “us-versus-us” issue as an “us-versus-them” issue. Also, because many of the complaints leveled against China (though not all) can be levied against the US as well, any strong action taken against China will surely lead to strong retaliations by China in scale and scope and may result in an unnecessary trade skirmish.
A better long-range solution to the “China problem” is for the US to look inside itself for improvements rather than laying blame abroad. Even if China engaged in all the unfair trade practices imaginable and the US engaged in none, US business could still compete with China. That’s because one country’s attempt to tilt the playing field can only shift comparative advantage to other sectors: it can’t eliminate the comparative advantage for the other country. The key is to take advantage and buy up the products subsidized by foreign governments and shift your own production to other sectors. The ability to shift to new industries – thanks to dynamic and flexible labor markets – has been an important strength of the US economy in the past and could be so in the future as long as Americans do not lock themselves into a vision of how things “ought to look.” For example, who would have thought that an American fence post company in Toledo, Ohio could compete against Chinese imports; or that auto parts production would be growing in the “right-to-work state” of Tennessee.
Many observers have noted that the US needs to resurrect its manufacturing base and bring the offshored jobs back. Indeed, President Obama has proposed a new minimum tax on foreign earnings and a 20% tax credit to companies that move operations back. This kind of action only adds more complexity to the tax code and presupposes where production should take place. The action does not allow for market flexibility but instead uses the strong arm of a presumably wiser government to redirect economic resources to the place deemed more appropriate by policy-makers. In a different form, this is precisely what we accuse the Chinese of doing.
The best way to resolve the apparent problems with international competition is, unfortunately, also the most difficult to explain and implement. More jobs would be created and more businesses would thrive if special-interest-directed government were reduced. Tax simplification and the streamlining of government rules and regulations could increase the flexibility and resilience of US businesses. Taxes should be collected in the least distortionary way possible to fund essential government services such as defense, police, fire and the justice system. Taxes and subsidies designed to redirect economic activity towards favored industries should be largely avoided.
However, proposals such as this, in the midst of an election campaign, are likely to go over about as well as bad-tasting medicine. Even though everyone may realize it is the best way to treat the underlying illness, politicians are unlikely to suggest administering it as long as their popularity is on the line … and that is sure to last until November.